Credit Score and Credit Depth Catastrophes: How divorce can derail your credit and what to do about it.
Ten Tips on Managing Joint Debts (including mortgages), to Protect Credit Scores During and After Divorce and What to Know about Credit Depth.
Navigating joint debts, especially mortgages, during and after a divorce can be overwhelming. Protecting your credit score during this emotionally charged time is crucial for a stable financial future. Both clients need to maintain and establish their own credit before the divorce is finalized. Credit is a key factor that lending institutions consider when determining a borrower’s eligibility for financing. Additionally, if a client needs to rent an apartment after the divorce, management companies often use credit as one of the primary tools to screen potential tenants.
Lacking credit depth can pose significant disadvantages post-divorce and as the financial planner, it's essential that my clients understand their credit status. This might involve reviewing recent credit reports to ensure parties are in good standing. Often, the spouse who did not handle the finances may lack credit in their own name which is a necessary component to establish financial independence and stability. In such cases, opening a credit card using their own social security number is key to help establish credit.
With 30 years of experience in mortgage lending, I've seen many borrowers struggle to obtain mortgage financing due to the critical errors made during the divorce process and transition. This blog offer guidance using firsthand knowledge and the actionable steps to help manage joint debts effectively, protect credit scores, establish new credit, and avoid the common pitfalls. Whether you're beginning the divorce process or rebuilding your financial standing, my experience as a certified divorce financial analyst can help guide you every step of the way.
Important Steps to Protect Existing Credit:
Create a Detailed List of Debts: List all joint debts, including the mortgage, credit cards, auto loans, and any other shared liabilities. Managing debts effectively requires knowing what is owed.
Set Clear Responsibilities: Clearly define who will be responsible for each debt during and after the divorce. Document these responsibilities in your divorce agreement. Misunderstandings happen more often than people think!
Communicate with Creditors: Inform the mortgage lender and other creditors about the divorce as some may offer restructuring the debt or offer temporary relief. Document, document, document!
Refinance or Consolidate Debts: If possible, refinance the mortgage and other joint debts in one spouse’s name. This can simplify managing the debts and protect the other spouse's credit score.
Make Timely Payments: Ensure that all joint debts are paid on time until they are completely transferred or paid in full. Late payments can negatively impact both parties' credit scores. Often times, one party assumes payments are being made on time when in fact, they are not.
Set Up Automatic Payments: To avoid missed payments, set up automatic payments from a joint account until the debts are divided. This ensures that payments are made consistently. Check monthly that the payments have cleared the account.
Monitor Credit Reports: Regularly check your credit reports from all three major credit bureaus, Transunion, Equifax and Experian. This helps you identify any issues early and address them before they affect your credit score.
Close or Freeze Joint Accounts: Close or freeze joint credit card accounts to prevent additional charges. This stops either party from accumulating more debt that the other might be held responsible for.
Seek Professional Guidance: Consult a CDFA professional or other financial advisor to create a debt management plan. A professional can provide personalized advice and help negotiate with creditors if necessary.
Include Debt Management in your Divorce Decree Agreement: Ensure that your divorce decree includes specific instructions on how joint debts will be handled. This can enforce compliance and provide recourse if one party fails to meet their obligations. Still keep in mind though, if one party fails to meet their obligations on a joint account, it could still negatively impact both credit scores.
By taking these proactive steps, joint debts can be managed effectively, minimizing the impact on both parties’ credit scores, and the financial challenges of divorce can be navigated with greater confidence.
Important Steps that Can Help Establish New Credit and Build Credit History:
Open a Secured Credit Card: This requires a cash deposit as guarantee but works like a regular credit card, and the payments are reported to at least one of the credit bureaus which helps build credit.
Become an Authorized User: Being added as an authorized user on a trusted relative or friend can help boost a person’s credit. However, it is important to ensure that the primary cardholder has a positive payment history.
Apply for a Credit-Builder Loan: These are typically small loans offered by smaller banks and credit unions that help people build credit. Payments are usually reported to at least one of the credit bureaus so on-time payments help build positive credit. The loan amount is held in a savings account and once all the payments have been made, the full amount is released to the borrower.
Get a Retail or Gas Card: Sometimes retail and gas credit cards are easier to obtain than traditional credit cards. By using the card for small purchases only and paying off the balance in full each month, it will help build positive credit.
Use a Cosigner: Some people will ask a trusted relative or friend to cosign for a loan or credit card. The thing to keep in mind is that if any payments are missed, it will affect both the borrower and the cosigner’s credit.
Report Rent and Utilities: Check to see if your leasing company or utility services will allow payments to be reported to any of the credit bureaus. Consistent on time payments can help establish credit history.
Pay All Bills on Time: Sometimes the use of alternative trade-lines can be used to show credit worthiness. Alternative tradelines refer to bills such as phone, utilities, auto-insurance and any installment payments that are not traditionally reported to credit bureaus. When these are paid on time it can help build a positive payment history .
Credit Monitoring: Sign up for a free credit monitoring service to keep track of your progress and ensure there are no errors on your credit report.
Build Savings: Establishing a savings account with consistent deposits helps demonstrate financial responsibility, even if it doesn't impact your credit score.
Stay Patient and Persistent: Building credit takes time and consistent effort.
By following these actionable steps, positive progress and achieving a solid credit history and financial success is possible.
