Three Credit Mistakes
to avoid when going Through Divorce
By Dave Jamison, NMLS 277794, Mortgage Consultant,
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.
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
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.
Accounts. I 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.
you have any questions regarding this article, or any home financing questions,
please feel free to contact Dave Jamison at 952-405-2090.
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.