Many people overlook the importance of credit after divorce. From start to finish divorce can feel more like a whirlwind than an orchestrated and well-planned process. Most couples will only realize the importance of protecting their credit after divorce. The best approach to protecting your credit is to be proactive. I've outlined the basics of understanding your credit and steps you can immediately take to protect it.
3 Steps to Protect Your Credit Before, During, & After Divorce
What is Credit?
Credit refers to your ability to borrow. Your credit is a reflection of your reputation as a borrower. When you try to obtain loans or a line of credit your “credit” gives the lender information that tells them how likely you are to repay the loan or line of credit.
Understanding the Impact of Low or No Credit After Divorce
Your credit determines your ability to buy something without requiring an all-cash payment or a cosigner. So, if you have a low credit score or you have no credit history of your own, then it will be difficult to qualify for loans independent from someone else. Little or no credit can make it difficult to obtain a loan for buying a house, renting an apartment or buying a car. The inability to obtain these items independently can make it hard for people to begin a financially independent single life post-divorce.
How Do Lenders Acquire Credit Information?
Lenders, credit card companies, insurance companies, landlords, and even some employers will pull your credit report. Your credit report is a collection of information that tells them things like:
- Loans you’ve had in the past, how much you’ve borrowed on each loan, and your payment history on those loans. Whoever has pulled your credit is wanting to know how many times you were late in making payments. This information is used to tell the potential lender or landlord about your historical behavior in paying your debts. They will use this in determining how likely you are to pay on debts in the future.
- Loans you currently have and the minimum monthly payment of each loan. They also see things like the funds you could borrow if you wanted to – such as credit card limits on open credit cards. What they want to know is how much you have in minimum payments each month. Compare that total to your available income and then see how much you have left over to afford the new payment.
- Bankruptcy, foreclosure, account write-offs (such as an overdrawn bank account, unpaid medical bills, unpaid utility bills, etc). If you see an error on your credit report, then you can dispute it. The credit bureau will ask for certain information to show that you paid the debt in full and on-time.
Your credit report is the master document behind your credit score. It serves as your reputation for paying your debts and bills.
3 Steps to Protect Your Credit Before, During and After Divorce
- First step to protecting your credit after divorce: pull your credit report. You are allowed to pull 1 free credit report each year. For my clients, I make this part of the necessary documents in the divorce process. If someone is contemplating divorce, then I always recommend they pull their credit report sooner rather than later. And when I’m working with both spouses I have each person pull their credit report. The information from the credit reports allows us to see which accounts are open, even if they are not being used, and if they are individual accounts or joint accounts. Being informed is the first step in protecting your credit after divorce.
- Second step to protecting your credit after divorce: keep your address up-to-date. If you receive statements in the mail and you and your spouse decide to live separately during the divorce, then you will want those statements to come to your new residence. If you have joint credit cards or joint loans you will want to be able to access those statements electronically. Most lenders now have electronic statements available. Customers can login to their account and view them. Whenever possible, you should share this information with each other so you can each go in and look at the statement monthly.
- Third step to protecting your credit after divorce: for each loan you have – either jointly or individually – set up an automatic payment for the minimum payment. There’s a great deal to think about and take care of in the divorce process. Bills can escape immediate attention and get lost in the shuffle. Automatically making the minimum payment will save your credit score by avoiding late payment notifications. You will also benefit by avoiding those annoying late fees.
Critical Fact to Understand About Your Credit After Divorce
It’s important to remember that divorce won’t affect your credit directly, but for the reasons mentioned above, divorce can affect your credit indirectly. The best action you can take is to be proactive, be informed, and make sure you know the loans and accounts you are responsible for.
Be mindful that when your name is tied to a debt you are responsible for the payment - even when the divorce decree states your former spouse is responsible for it. So, if your former spouse fails to make a timely payment, or fails to make any payments after the divorce, then your credit can be impacted by their non-payment.
In most situations, the financial institution only cares about the name(s) associated with the debt. Unless your name is removed from joint debts in the divorce process, the financial institution will come to you for payment when your former spouse fails to pay.
Transitioning to the divorce process while planning for your financial future is multifaceted and requires a multipronged approach. Certain divorce processes support a better-planned transition than others. To learn about your Missouri divorce process options contact one of our experienced St. Louis Collaborative Law professionals today.
Nicole Davis is a certified divorce financial analyst, trained mediator and collaborative law professional. She is experienced with helping couples achieve a good financial settlement. To learn more about divorce finances give her a call or visit her website.