Debt, Credit and Divorce

One of your most valuable assets is your credit. It is a key characteristic of your financial profile that financial institutions use to decide whether to loan you money.

A healthy credit rating and credit report is necessary for many of the transitions that may be necessitated by divorce: to buy a car, secure a good mortgage rate, lease a new residence, obtain employment, and a myriad of other financial transactions.

Credit scores range from 300 to 850, and the higher the score, the better. Experian says that a score of 700 or higher is generally considered good with 800 and above considered excellent. If your credit score is below 700 you could still qualify for credit cards, mortgages and other loans, but you may have to pay higher interest rates or meet other qualification requirements.

Your credit report will list all open lines of credit such as mortgage loans, auto loans, bank loans, educational loans and credit cards. It details the name of the lender, a brief summary of terms, your outstanding balance, your monthly payment amount and a history of your payments. It may also reflect any liens against property you own, legal judgments against you and any bankruptcies you have experienced.

This information is intended to reflect how responsible you are in repaying your debts and thus affects whether they consider you a good risk for extending credit.

Lenders review your score and your open and closed credit accounts and loans along with your payment history. This information reveals how much available credit you have accessible to you, how much you are using (utilization rate) and if you pay in a timely fashion or if any debt has gone to collections. They also track the number of soft or hard inquiries on your account for the previous two years to determine the extent to which you seek credit. All of this is conducted to determine your capacity to pay your bills.

Your bank, investment and retirement information does not affect your credit score. However, it does factor into your credit report but mortgage, auto and personal loan lenders customarily use information about your checking, savings, and assets to determine whether you have the capacity to take on more debt.

While it is always important to protect your credit, when you are in the process of divorce, it is especially important. You may need to sell the marital home and rent or purchase a new home. Landlords use your credit report/rating to determine whether you may be a reliable tenant who will pay in a timely fashion.

When you are contemplating divorce or already on the path, you should consider severing open lines of credit. This will avoid your responsibility for any excessive charges by the other party during divorce. It prevents any damage to your credit history if your future ex makes late payments or if the account becomes delinquent.

If possible, do not close a credit card that has been long established. With your attorney’s approval, it is wise to remove a spouse who is an “authorized user” on a credit card in which you are the primary signer. Most major credit card issuers do not issue credit cards that have joint account holders. One spouse is primary, the other, an authorized user.

Or, if you are the authorized user, follow up with the same credit card financial institution to open another account in your name, then ask your spouse to remove you as an authorized signer. The number of years an active account is open is a positive influence on your credit rating. That is why it is important to try to leverage that by opening an account in your name only at the same institution.

Similarly, keep unused accounts with zero balances open. If you close these accounts, it reduces your available credit and this makes it appear that your utilization rate has suddenly increased. The utilization rate is the balance-to-limit ratio.

You should run your credit report at the start of your divorce and monitor it throughout the process. And run the credit report again before the divorce decree is issued. Your credit report can be pulled for free once per year at www.annualcreditreport.com.

Your future ex-spouse will be in possession of all your personal information. It is recommended that you place a freeze on your credit file to prevent any new credit accounts to be opened in your name.

The freeze will need to be removed at the time of securing any purchase/lease requiring a credit check, but this is can be managed easily with a phone call or done online in most cases with all of the three major credit agencies.

During the divorce, it is highly recommended to work together and allocate available resources to pay off any outstanding debt. This prevents any disruption in your credit history and your credit score will remain intact.

Credit card companies are not required to adhere to the terms of the divorce decree. If the settlement agreement or decree indicates that your ex-spouse must pay the credit card bill outstanding from the marriage, you can still be held responsible because you were on the account during the time of the charges.

However, if the debt is secured by an asset such as an auto or home, and the asset will not be sold but awarded to one of the spouses, the debt will accompany the asset that will be retitled in the other spouse’s name alone.

In this case, be sure to determine in advance of dividing the assets if the loan or lease can be refinanced solely in that spouse’s name. Refinancing, in one spouse’s name is not a guarantee. It may not be feasible for the awarded spouse to qualify because of income level post-divorce. Even with support considered as another source of income refinancing may be challenging. Also, many mortgage lenders require court ordered spousal and/or child support be ordered for a minimum of three years into the future to consider it as income.

If you find yourself with little credit in your own name or a lower than 700 credit score, there are steps you can take to remedy that situation. It is important to continue to pay all your bills on time, such as utility bills, education, medical, etc. Payment history is 35% of your FICO score. Make timely payments via automatic payments or with text alerts.

During the divorce, you are still considered to be legally married. It will be easier to open a new credit card in your name only even if you do not have income attributed to you personally. Make small purchases periodically and pay the credit card on time to build up a credit score.

If you have credit cards already in your name, keep your credit utilization ratio low to boost your score. It is ideal to keep it under 10% if possible and never in excess of 30%. The major credit agencies consider your ratio on each individual card as well as the total ratio across all of your cards. Your score will be impacted negatively by racking up debt on one card, only, while allowing the others to be unused.

If you cannot qualify for a conventional credit card due to your income or credit history, you may want to consider a secured credit card. These cards afford a greater ability to qualify since they have more flexible income requirements. With a secured card, you put down a refundable deposit upfront, which acts as your credit limit, and you build your credit score by paying your balances on time and in full. Capitol One, First Tech Credit Union, and Citibank have issued secured credit cards and may be good places to start your research.

Your credit rating is a key indicator to others of who you are. Protect it at all times, especially during divorce.

This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.