Is your divorce affecting your credit score? Divorce is a challenging time. Between parenting plans, splitting of assets, who gets the dog. Many divorcing couples overlook is the effects of their divorce on their credit score. Simple things can reduce your score overnight by over 100 points or more if you are not careful.
3 Mistakes to avoid while going through divorce
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Stop paying your bills
The number one category for credit scoring is how well you pay your bills. Payment history makes up 30% of the credit score. Many times when couples split up before the divorce is final or they ever meet with an attorney, they will stop making payments on their credit accounts. If you stop paying credit cards, car loans or mortgages it will adversely affect your credit score and can prevent you from refinancing your home, purchasing a new one, renting or even buying a new car.
A better plan is to freeze all revolving accounts so additional debt cannot be added to the family budget. You must continue to make the minimum monthly payments on the credit cards. Make your payments as usual on your auto loans and home loans.
These simple steps will protect your credit score for future use and limit the amount of debt the family will have post decree.
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Over Charging/Going over the Limit on your credit cards
Another large part of the credit score is your available credit. If you go over the limit, I have seen scores drop over 125 points in one day by just adding $200.00 of debt. The $200.00 in debt put two credit cards over the limit causing the client to go from a 667 credit score to a 542 credit score, that changed their loan from approved to denied.
Over charging or going over the limit can happen when one of the spouses moves out and uses joint accounts to furnish the new residence or it can occur if you are using your credit card to pay your attorney fees with credit cards.
Yes, $200.00 severly impacted the Credit Score from 667 to ↓ 542
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A better plan is for each spouse to get their own credit upon one or the other moving out so that all expenses are traceable to each party. As mentioned, it’s advised to freeze the account so that no additional debt can be incurred.
Finally, if you cannot get a new card and you are getting close to a limit, call the credit card company to increase your credit limit. Credit card companies are more likely to increase credit lines if you are abiding by your contract limits, once you go over the limit they are less likely to assist you.
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Closing Accounts
When couples are faced with divorce, they want to protect themselves from further loss. Couples either on their own or at the advice of their attorney close all the credit accounts. If it’s due to circumstances surrounding the divorce, closing the accounts may be advisable. However, if we can do this collaboratively
. If the divorce is amicable and there is some trust left, leave the accounts open, at least until you have your housing situation squared away.
I recently had a client that had a 744 credit score, it took them 6 months to complete the divorce. During the divorce they paid off all the credit card debt and closed the accounts. Sold their home, and paid off the car loans. You would think with no debt the credit score would be over 800! The facts of the matter turned out to be the exact opposite.
A better plan would be to again freeze the credit card accounts and active lines of credit so that no additional debt jointly held debt would be obtained. You can always payoff accounts, you just want to leave them open long enough to obtain your home loan financing.
Have questions? Contact Your Trusted Minnesota Divorce and Mortgage Experts Gale or Dave Jamison at 952-405-2090.
David Jamison is an Accredited Speaker and presenter of Continuing Law Education on the subject of Divorce and Mortgage, A Certified Mortgage Divorce Planning Professional, Certified Mortgage Planning Specialist and Dave has been featured on the Radio as a Divorce Mortgage Specialist.
Check out the Power Play video with Credit tips for Divorce POWER PLAY 2