You Deserve The Credit: Divorce and Your Credit Rating
© 2006 By Lori A. Grover‚ N.C.P.M.‚ President‚ Divorce Resource Center of RI
Our Consumer Credit Report is the financial story of our lives (on paper) which is updated monthly by the three major credit reporting agencies: TransUnion‚ Equifax and Experian. Each credit bureau independently calculates and measures credit activity such as: new inquiries‚ newly opened accounts and payments made on existing accounts in addition to many other types of data such as certain public records‚ for example. Once the data is tabulated you are assigned a numeric score by each credit bureau which is called a FICO (Fair Issac Corporation) score‚ and each one will probably be slightly different due to the slight differences in the way the bureaus “weigh” different types of accounts.
FICO: Your Credit Score
FICO scores range from in the 400’s, which I call ailing or distressed credit‚ to up in the 800’s which is considered excellent credit. Now I do understand that your credit is certainly not the most exciting topic of discussion‚ but it is very important to us as consumers because FICO scores determine how much you’ll pay (interest rate) for being extended credit (car loans‚ store charge accounts‚ credit cards‚ mortgages) of any kind from a Financial Institution.
FICO scores of 620 and above generally help lower the rate of interest on mortgages‚ car loans and some revolving credit cards providing no other adverse factors appear on your report such as Bankruptcy or recent Court Judgments against you
If you’ve ever had billing or payment problems with a creditor I’m sure you’ve experienced the endless loop of press ‘this and then that’ option on your telephone desperately trying to get a live body on the phone to help you.
Many people eventually become so frustrated by the process that they give up and the problem ends up going unaddressed!
But It’s Not My Fault! Due to the increasingly fast pace we now live at‚ credit report errors are not uncommon and many consumers will find at least one error on their credit report and have no idea how to begin to fix it. Most won’t even know the error exists until they apply for some form of additional credit elsewhere. Keeping tabs on your credit doesn’t have to be a daunting task and I suggest that consumers obtain a professional three bureau report at least once a year from Equifax‚ TransUnion and Experian. This is especially important for divorcing couples.
Errors that potentially lower consumer FICO scores can greatly affect‚ and in some cases‚ prohibit the purchase or refinance of a home. Once you receive your report read it carefully. Should you find an error you will be required to document your dispute and reply to the individual bureaus by mail or online. Once the corrections are made you will eventually be provided with an updated report but be patient‚ as it can be a long process and may not always be completely corrected the first time.
Using Credit Responsibly
Overextending your credit creates another especially difficult scenario especially if you are divorcing. Consumers who carry a fifty percent or higher balance to the available credit line become vulnerable in other ways: The computer that scores your reports may flag these accounts as high or ‘maxed-out’ and you will most likely receive even more pre-approved credit offers in the mail! Although it is easy to purchase on credit I strongly advise my clients against the ever-popular “buy now‚ pay later” promotions. These types of revolving accounts typically report to the credit bureaus as installment loans and if you’ve been extended $2‚000 in credit and make a $2,000 purchase under one of these plans (on furniture‚ for example)‚ that account can sit on your credit report as a maxed-out account for an entire year that no payments are due.
Everyone needs credit in today’s world (to rent a car you must have a credit card)‚ but for many consumers debt has become a crushing financial and emotional trap.
Debt Relief!
I am often asked by my clients about the options available to them when they have just too much debt to handle and there are several. So let’s look at some of the pro’s and con’s of each.
- Credit Counseling Agencies
- Bankruptcy
- Debt Consolidation by Refinancing Your Home
Although credit counseling services can help relieve the financial burden they often have far reaching repercussions. Many new Credit Counseling Agencies have sprung-up in recent years that function as a liaison between the consumer and the creditor‚ negotiating on your behalf to lower or eliminate interest and over–limit fees so the arranged payment actually pays down the principal balance.
Now this can greatly reduce the financial burden‚ stop the collection calls and make your debt manageable‚ however what most consumers don’t realize is that these creditors now report to the credit bureaus that the debtor’s obligations are managed by a credit counseling service.
Now why should this matter to you? Because some lending institutions still consider these managed accounts on the same par with Bankruptcy so consumers could typically pay higher interest rates on future credit needs. Late payments‚ accounts that are managed by credit counseling services‚ collection accounts and defaults (profit and loss charge–off’s) remain on your credit report for at least seven years after the last reporting date by the creditor.
Bankruptcy can be claimed as a Chapter 7 which will discharge‚ or eliminate many types of debt or a Chapter 13 in which the Bankruptcy Court will devise a plan to restructure your debt which you must follow‚ but either way‚ the Bankruptcy will remain on your credit report for up to 10 years.
It is important to understand that the Bankruptcy laws have changed significantly since 2005 and these changes have narrowed the window of who qualifies for Bankruptcy and to what degree of debt relief they are entitled to under Bankruptcy Law.
When I meet with clients faced with debt they need to clear out in a divorce situation‚ I examine refinancing the home if possible as the first option before anything else. The consequences are almost always less damaging to their credit rating‚ and if there is equity in the home the results can be very encouraging in terms of monthly savings.
The benefits are monthly payments that are often greatly reduced or even eliminated‚ increased monthly cash flow‚ and their credit ratings have been preserved and will recover if they are damaged‚ usually in about a year to a year and a half. This is especially important in a divorce situation when the parties are looking to make a clean break. And then there’s the greatly reduced stress…
Quick decisions made out of panic‚ fear‚ or pressure from debt collectors could cost you dearly in the long run if you make a decision without exploring all the avenues available. But there is one major caveat to a cash–out home refinance to pay down debt and that is… Discipline. You must have the discipline needed to not go out and do it all over again!
