STEPS TO BUILDING CREDIT AFTER DIVORCE
Posted by Mary E. Ramos | Divorce
TYPICAL POST-DIVORCE SCENARIO:
“After my divorce, my ex was responsible for paying on several credit cards. The credit card companies refused to remove me from the accounts, so the judge ordered my ex to pay them in a timely way to avoid credit problems for me. He did not pay them in a timely way and it took three months for the creditors to contact me and ask me to pay since he didn’t. I have begun making payments and filed a contempt order with the court. But each credit card company and their collection agencies (for those who sold the debt) reported delinquencies and collections on my credit report. Is there any way to dispute this on my credit?”
The Reality of Joint Credit
It is much harder to divorce your joint financial obligations than it is your spouse. As you have found, joint credit card accounts remain joint accounts until the account is paid off and closed. You can easily get bad credit from the divorce if your former spouse is non-compliant. The reason for this is that when you opened the joint accounts, you entered into a legal contractual agreement with your creditors. A divorce decree issued by the court does not change that. You’re both on the hook for your credit after the divorce because you both gave your word and they are holding you to it.
Your divorce attorney should have brought to your attention that spouses who are assigned certain accounts to pay in a divorce decree do not always follow through on those assignments. Some fail to pay because they truly cannot afford to; others don’t pay because they don’t manage their finances well, and some don’t pay out of spite. You get the picture. In any event, counting on an ex-spouse can be a high-risk venture!
Protecting your Credit After Divorce
So how do you protect your credit rating and avoid paying everything for which your ex-spouse was responsible? To not end up paying everything, communicate with your ex and determine if he plans to meet his obligations and when.
We realize that communicating with an ex-spouse can be unpleasant. However, the more information you have, the better off you will be to make decisions concerning your current situation. If things are really bad between you, it may be best to communicate in writing or through a lawyer.
The reality is: If he doesn’t make the payments, you should. It’s your credit on the line, but regardless of how the conversation with your ex goes, you should follow through on the court action. One way to reduce the damage to your credit after divorce is to have your spouse transfer the balances off of delinquent accounts and into a credit card in his name only. At this point, he may not qualify for a card in his own name, but the court may decide that’s his problem!
Ideally, to avoid bad credit following the divorce, all joint accounts should be dissolved. Home mortgages should be refinanced in one person’s name or the house sold. Car loans should be refinanced or the car sold. Credit card accounts should be closed and the balances transferred to separate credit card accounts in each spouse’s name.
Steps to Rebuilding Credit After Divorce
Although you cannot completely be shielded from your ex’s actions, here are a few steps you can follow to start building your credit worthiness again:
Open Checking and Savings Accounts:
Having these bank accounts establishes you as part of the financial mainstream. Lenders want to know you have a checking account available to pay bills, and a savings account indicates you’re putting aside something for the future. Having bank accounts, though, gets you started on the right path and gives you practice in managing your money.
Get a Copy of Your Credit Report
Next, you need to find out how lenders view you. Most base their decisions on credit reports, which are compiled by for-profit companies known as credit bureaus. You are entitled to a free credit report from each of the three major bureaus each year.
Typically, a credit report includes identifying information about you, such as your name, address, Social Security number, and birth date. The report may also list any credit accounts or loans opened in your name, along with your payment history, account limits and any balances you owe. One website you may use to access your reports is www.annualcreditreport.com.
If you’ve had credit problems, your report will list them. Don’t wait until after your divorce for a credit report. Then you can see a clear before and after picture of your credit rating.
Fix Any Errors or Omissions
Bad credit after divorce can easily come from mistakes. Some credit reports include errors — accounts that don’t belong to you or that include out-of-date or misleading information. You should read through each of your three reports and note anything that’s incorrect, especially after you have finalized your divorce process. Negative information, such as late payments, delinquencies, liens, and judgments against you, should be dropped after seven years. Bankruptcies can stay on your report for up to 10 years. Once you have a list of problems, ask the bureaus to investigate errors listed on their reports. You can use the form that came with your report if you received it by mail, or use the Web link if you accessed your report on the Internet.
Add Positive Information to Your Report
The more information you can provide about yourself, the more comfortable lenders may feel extending credit to you. In addition, certain information — such as having the same job or address for a few years — can make you appear to be more stable in lenders’ eyes. While this information isn’t used in creating your credit score, it’s often used by lenders in addition to credit scores to make lending decisions. You may also find that your report doesn’t include credit accounts or other information that it should.
Also, submit a 100-word statement to each of the bureaus explaining your situation. It will not change what is reported, but many lenders will pay more attention to your positive information and disregard the negative if there is a logical explanation. In the future, when you apply for credit or a loan, disarm the situation in advance by explaining the situation before they check your credit. Having a copy of the divorce decree assigning the accounts to him is also a good idea.
Additional Credit Considerations After Divorce
- Are your employer and your job title listed? If you’ve had the job for less than two years, your previous employer and job title should be listed as well.
- Is your address listed and correct? If you’ve been there less than two years, is your previous address listed as well?
- Is your Social Security number listed and correct? This is the way most lenders will identify you.
- Is your telephone number listed and correct? Many lenders may not extend credit if they can’t call you to verify information.
- Does your report include all the accounts you’ve paid on time? Some lenders don’t report regularly to credit bureaus, and some report to only one or two, rather than all three. You can ask the creditor to report the account to a bureau that doesn’t list it. If the creditor refuses or doesn’t respond, you can send a letter to the bureau with a copy of your latest statement and canceled checks to prove you’re paying on time.
Three Common Routes for Establishing New Credit
1. Apply for Department Store and Gasoline Cards
These are usually easier to get than major bank credit cards such as Visa or MasterCard. They’re among the easiest methods of rebuilding credit after divorce.
2. Take Out a Small Personal Loan from Your Local Bank or Credit Union
Then pay that money back over time. The bank may require you to put up some collateral — such as the same amount you’re borrowing, deposited into a savings account. But the loan, if reported to the credit bureaus, can still help build your credit history. Make sure that it will be reported before you borrow the money.
3. Apply for a Secured Credit Card
These work something like the loan described above: You deposit a certain amount at a bank, and in return, you’re given a Visa or MasterCard with a credit limit about equal to the amount you deposited. Avoid any card that charges a big upfront fee for processing your application or a high annual fee.
Once You’ve got Credit, Use it Right
Charge small amounts on each card — but never more than you can pay off each month. You need to use credit regularly to establish your credit history, but there’s usually no advantage to paying interest on those charges. Keeping a small percentage of your account in use will reflect well on your report, and help you avoid accumulating more bad credit after divorce.
Once you’ve been approved for one card or loan, don’t rush out and apply for several more. Applying for too much credit will hurt, rather than help, your score. Most people need only one or two bank cards, a gasoline card, and a department store card to start a solid credit history. Acquire them over a year or more for the best bonus to your credit after divorce.
Pay your bills on time, all the time. This includes household bills such as utilities and telephone as well as your credit card bills and loans. Late payments on any of these accounts can wind up in your credit report, and can really hurt your credit score, the three-digit number widely used by lenders to evaluate your creditworthiness.
Don’t max out your credit cards. In fact, don’t even come close. Try to avoid using more than 30% or so of the credit you have available to you — even less if you can. Your credit score measures the difference between the credit available to you and what you’re actually using. The smaller that gap, the more it hurts your score. Lenders will worry that you’re becoming overextended and won’t be able to pay your bills if you charge too much. If you’ve charged up to 80% or more on your credit card, this can have a negative effect on your credit score.
Tackle Credit Issues in Advance – Consult an Expert Divorce Attorney
The attorneys a Ramos Law Group are professionals at helping people end their marriages on the best possible terms. We’ve serviced hundreds of high-profile divorces in Houston, Texas, including high asset divorces like those of business owners and executives.
Call the Ramos Law Group to schedule your consultation.