Preparing for a divorce financially before divorce can set you up for financial success after divorce. Establishing and protecting your credit is key to being financially secure and independent after a divorce. Your credit can impact many different areas of your life – not just your ability to get a loan. Having good credit can provide:
Favorable insurance premiums – lowering your monthly expenses
Favorable loan rates – lowering your monthly payment & overall borrowing cost
Better income potential – good credit is imperative for certain careers
Ability to obtain a loan and in your name solely– decreasing the need to pay cash for large purchases or have a cosigner.
In this article, we cover preparing for a divorce financially and the 5 steps to protect your credit during divorce:
Pull Your Credit Report
Establish Your Own Credit
Schedule Bills to be Auto Paid
Pay Down as Much Debt as Possible
Continue the Timely Payment of Debts After Divorce
Pull Your Credit Report
The first step to establishing and protecting your credit in divorce is to understand your current credit situation. You can do this by pulling a free credit report. Once you’ve pulled your credit report you will make a list of all open accounts reflected on your credit report. You will want to make a note of each of the following:
In who’s name is the account listed: yours, joint, or yours as an authorized user
Total balance currently due
Minimum monthly payment
If you have questions about an account, then you can call the financial institution directly. Their contact information is usually listed on your credit report. You can obtain your free credit report by visiting https://www.annualcreditreport.com/index.action. Tip: You do not have to buy all three credit reports. Simply choose one of the three credit reports and download it.
Establish and Build Your Own Credit
As you review your open accounts pay close attention to who’s name the accounts are held in. If you have no accounts in your name solely, then you are at risk for having no credit of your own post-divorce. You will want to begin establishing your own credit. The easiest, and fastest, way to do this is by opening a credit card in your own name. Doing so may cause your credit to drop a few points, but you will be able to use your household income on the application. Likewise, the slight ding to your credit score is temporary and it will recover after some time.
It is far better to establish your own credit than to worry about a short-term ding to your credit score due to applying for your own line of credit.
Schedule Bills to be paid automatically
There will be many transitions in divorce, including:
Change in residence
Change in bank accounts
It’s easy to forget about everyday bills when things are in transition, but these are the very things that can cause a real hit to your credit. And a hit to your credit can mean the difference between getting a loan in the future and not. It can also be a determining factor in:
Your ability to get a home or auto loan
Your ability to rent an apartment
Your ability to get certain jobs
Unfortunately, most lending institutions will only look at your payment history and whether you’ve had a late payment or not. They may understand the reason for a late payment while you are divorce, they are bound by the loan approval criteria of their company. The easiest way to avoid unnecessary late fees and hits to your credit is to setup as many bills as possible on auto pay. This will ensure that your bills are paid on time throughout your divorce.
Be mindful if you are setting the bills to auto pay from a joint account. You will want to change the auto pay banking information when you and your spouse decide to close the account from which bills are being paid.
Pay Down as Much Debt as Possible
Paying down as much debt as possible during divorce will help to set you up for more financial success after divorce. Each debt requires some sort of monthly payment until the debt is paid in full. The more debts you have – even if small – is going to require you or your spouse to make the payment after the divorce. For debts that are joint, you and your spouse will decide what you want to do with that debt in the divorce. You will decide whether:
You take it
Your spouse takes it
Pay it off
When you pay down debt associated with a credit card, it reflects positively on your credit report. This is because part of your credit score is based on your ratio of credit available to credit used. This is called your credit utilization rate. If you have a credit limit of $10,000 and you have used $9,000 of your limit then you have a high credit utilization rate. Whether it’s true or not = a high utilization rate sends a signal to lenders that you are stretched financially. It assumes you are using your lines of credit to make it work financially.
This reflects negatively on your credit score and will make it harder for you to get a future loan (e.g.) or lease (e.g. apartment). When you pay down your debt, you are lowering your credit utilization rate and improving your credit score.
Pay bills and debts on-time after divorce
You will want to continue the timely payment of debts after divorce. If your credit is already in good shape, then this will keep it that way. If your credit needs improving, then you will establish that you’re able to make your payments consistently and on time – this will improve your credit score over time. The best way to accomplish this is to continue paying your bills automatically from a bank account. This will save you a ton on late fees and improve your credit score.
Also, even if you usually pay more than the minimum, you can always set it up to where the minimum is paid automatically and then you pay more by some other method.
Contact An Experienced St. Louis Divorce Financial Planner For More Information on Preparing for Divorce Financially
Nicole Davis is an experienced St. Louis Certified Divorce Financial Analyst (CDFA), divorce financial planner, and divorce mediator. She works with clients directly or in collaboration with their family law attorney or mediator. She helps her clients craft fair and equitable divorce financial settlements - allowing them to accomplish their short-term and long-term financial goals. If you would like to learn more about her divorce financial planning process and how she can assist you in making important financial decisions during divorce, then call her at 314-272-0727 or schedule a 30-minute consultation online today.