Going through a divorce is a very challenging time for most people, parenting plans, splitting of assets, who gets the dog and so on. One area that 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. Here are three mistakes to avoid if you are going through a divorce.
Stop paying your bills.
The number one category for credit scoring is how well you pay your bills. Payment history makes up 35% 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, and 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.
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.
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 in mistake number one, 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.
We see this one a lot! 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 account, sometimes, due to circumstances surrounding the divorce, closing the accounts may be advisable. However, 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. In the process of the divorce they, paid off all the credit card debt and closed them, sold the house, 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. At the time we needed a 640 credit score to qualify for a home loan, the credit score dropped to an amazingly low 636!
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.
Should you have any questions regarding this article, or any home financing questions, please feel free to contact 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 980 am Radio as a Divorce Mortgage Specialist.