Credit scores are one of the most critical finances pieces of recovering financially from a divorce. Credit scores are also one of the most overlooked pieces of post-divorce, as I've found by communicating with thousands of my dear blog readers. I reached out to Gerri Detweiler, director of consumer education for Credit.com, and author of the free ebook Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights for tips on navigating this important reality of life.
How big of a problem are credit scores for people facing divorce?
Your credit scores can take a big hit when you divorce, usually for one of three reasons: One, your income may drop and/or your expenses may increase since you are no longer splitting them with a spouse. This may mean it’s harder to keep up with bills. The second is that most couples have at least one joint account when they split. If the debt isn’t paid off right away it will usually end up being the responsibility of one spouse, and if he or she doesn’t pay it both credit reports (and by extension credit scores) will suffer. The third problem is identity theft. It’s surprisingly common for an ex to “borrow” the other person’s information in order to get new credit, utility services, etc.
Why is divorce so often cited as a reason for bankruptcy?
Again, after divorce, many people find their finances stretched. Some have to pay alimony, others find they're paying for new expenses such as child care, and most will find their expenses increased because they're no longer splitting bills with their now-ex.
Some people are pushed into bankruptcy by their former spouse. Let’s say they owned a house together but they either don’t want to sell it (because they want the children to keep living there) or they can’t sell it because it’s upside down. One of them agrees to pay the mortgage; it might be the spouse who lives there, or it might be the ex who is supporting him or her. But the mortgage doesn’t get paid. Maybe that spouse eventually files for bankruptcy, and the other one ends up having to file in order to keep the house and catch up on payments, or to discharge their responsibility for the remaining loan.
Why is so important to make your credit score priority if you’re going to divorce?
Divorce is usually very stressful, and even if you are glad to be splitting up, there are a lot of details they have to be taken care of. This means that it’s easy for bills to slip through the cracks. One late payment can cause an otherwise excellent credit score to drop by 50, 75 points or more. So it is important to try to make sure that bills are paid on time.
In addition, after divorce you will often need good credit to rent or buy a new place to live or get utility services without a deposit. You may decide to hunt for a better paying job or start a small business, both of which may involve credit checks. And let's face it: if your credit does take a nosedive, it's not going to be fun having the reminder of that time in your life coming back to haunt you haunt you several years later when you’re filling out applications for credit.
What should everyone – regardless of credit history – do when it comes to their credit when facing divorce?
Get your credit reports so you know exactly what bills appear there and so that you understand your responsibility for them. If you are an authorize user, you're typically are responsible for the balance but you may want to get removed from the account if you are worried about whether your ex will pay it on time. For any joint accounts, they should be closed from future purchases and balances should be paid off as soon as possible. Keep in mind that you are legally responsible to repay the joint debt until it’s paid off. Your divorce decree doesn’t change that.
If your ex is abusive or vindictive you may want to place a fraud alert on your credit report, or even freeze your credit so that no one can access your credit report information without a PIN you provide.
If you are facing divorce and have lousy credit what can you do to rebuild it?
The good news is that when it comes to your credit, you can always get a fresh start. While you may not be able to change the past, going forward if you are meticulous about paying your bills on time you can see significant improvement in your credit scores. Recent information tends to have the greatest impact, so make sure that you have open active accounts that are paid on time. If you don’t already have one, get a credit card in your own name, even if it’s a secured card.
Of course, you can’t picture credit if you don’t know where you stand so get your credit scores to monitor your progress. (You can get a free credit score and analysis of your credit, along with an action plan at Credit.com.)
In the short-term, if you have no or poor credit, what are the best ways to get a loan or cash to finance a needed car, a family lawyer or even daily expenses, which is common for people in the middle of a split?
What types of financing you’ll get will depend in large part on how good or bad your current scores are. If you don’t have a lot of credit, it may be easier to get a loan then if you have a lot of debt or very poor payment history. Some consumers find they are able to get a personal loan; others may turn to credit cards, even if they have a fairly high interest rate. Watch your mail; if you get an offer for a low rate balance transfer, you may want to take advantage of it. Another option that doesn’t require a credit check is a loan against a retirement account such as a 401(k). It is not ideal by any means, but it’s usually better than cashing in a retirement account early and paying taxes and penalties. Finally, you may be able to get a loan from family members or friends. These loans don’t appear in your credit reports, so that can bean advantage. But it’s best to put details in writing so everyone’s clear on how and when this loan will be repaid.
What if you start hearing from debt collectors about debts your ex didn’t pay?
If the collector is trying to collect from you, you have the right to ask them to put it in writing and I recommend you do so. Once they do, if you don’t believe you owe the debt, or you don’t believe it’s correct, you have the right to request they verify the debt. Put your request in writing.
If the collector calls about a debt your ex owes, you don’t have to discuss it with them if you don’t want to. You can explain that you can’t be of help and asked them not to call you again. That generally should stop those phone calls. If it doesn’t, you can file a complaint with the Consumer Protection Finance Bureau.
This post originally appeared on my Forbes column.
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Emma Johnson is a veteran money journalist, noted blogger, bestselling author and an host of the award-winning podcast, Like a Mother with Emma Johnson. A former Associated Press Financial Wire reporter and MSN Money columnist, Emma has written for the New York Times, Wall Street Journal, Forbes, Glamour, Oprah.com, U.S. News, Parenting, USA Today and others. Her #1 bestseller, The Kickass Single Mom (Penguin), was named to the New York Post's ‘Must Read” list.
Emma regularly comments on issues of modern families, gender equality, divorce, sex and motherhood for outlets like CNN, Headline News, New York Times, Wall Street Journal, Fox & Friends, CNBC, NPR, TIME, MONEY, O, The Oprah Magazine and The Doctors. She was named Parents magazine’s “Best of the Web,” “Top 15 Personal Finance Podcasts” by U.S. News, and a “Most Eligible New Yorker” by New York Observer.
A popular speaker, Emma presented at the United Nations Summit for Gender Equality. Read more about Emma here.