WHAT YOU NEED TO KNOW ABOUT DIVORCE AND YOUR C R E D I T DIVORCE MEDIATION CENTER RHODE ISLAND RHODE ISLAND 1296 Park Avenue, Cranston, RI 02910 401-228-8789 www.ridivorcemediationcenter.com
The Truth About Since our credit rating affects just about every aspect of our financial lives, it's no surprise that divorcing couples face a virtual mine field when settling their marital estate and dealing with joint consumer debt and mortgages. For years, the criteria and methods used to tabulate credit scores has been perhaps the most guarded secret in the world of finance, leaving consumers in the dark about how to manage, maintain or repair their credit rating. The three major credit bureaus, TransUnion, Experian and Equifax, each compute consumer credit scores on a monthly basis independently of each other, based on information they receive from your creditors. One of the biggest flaws in the credit reporting system is that creditors are not required to report their information to all three of the credit reporting bureau's which is why credit scores can vary wildly between the three reports. Because of this imperfect system, divorcing couples must do their homework about credit and be as knowledgeable as possible before they begin separating and closing their joint accounts. Then they must be especially diligent to monitor their credit reports from all three credit bureaus once all of their divorce related transactions have been completed to insure their credit reports are accurate and up to date, reflecting accounts that have been paid, closed or transferred. I recommend getting the first reports three to four months after all accounts have been closed and separated. Many consumers don't realize that they're entitled to obtain one free consumer credit report per year from each of the three credit bureaus, however these free reports will not include your credit score. If you want your scores included with the reports you will be charged a fee. If your goal is to just make sure that your reports are accurate and they reflect all of the accounts that have been closed or separated, you can obtain the first reports without your scores, then obtain the reports with the scores once you are sure your entire credit file is accurate. I recommend using Experian's web site which offers the option of obtaining all three reports and being able to compare them side by side, as opposed to any of the widely advertised credit report web sites that attempt to wrangle you in to various 'pay later trial memberships' in exchange for including your credit scores with the reports. Later in this guide I will detail how consumers can correct credit inaccuracies. As a side note, I will mention that in some divorce situations it may be advisable to obtain your credit reports prior to initiating a divorce if you are concerned that your spouse has obtained credit or used credit without your knowledge. 2011 Lori A. Grover, NCPM, RI Mediation Center, LLC. All Rights Reserved
The Ties That Bind You Cards For many couples, untangling their financial obligations during a divorce is a daunting task. And in many cases these couples will not only struggle with the financial burden of paying their share of their joint debts on a single income, they'll also be forced to make decisions and take actions with no indication of the impact it will have on their credit rating. This presents a number of problems when it comes to re-establishing individual credit or purchasing real estate after a divorce. One of the biggest consumer complaints is that credit reporting agencies have been allowed to fly beneath the radar with their refusal to provide transparency to the credit scoring process. This has rendered consumers virtually helpless in understanding how to manage their credit and avoid actions that could cost them as much as a 100 point drop in their credit scores. The other disadvantage, where creditors don't report to all three credit repositories means there's no guarantee that all your credit accounts are being accounted for in your overall credit profile. Now this may be good news for those with financial difficulties, but for those who always pay their credit obligations on time, it could mean not getting the credit they deserve. Auto Loans Mortgages Most divorcing couples share as least some amount of consumer debt commonly in the forms of mortgages, joint credit cards or credit card accounts (with a spouse as an authorized user), installment loans and lines of credit. Divorcing requires all these obligations be addressed, and depending on the terms of their marital settlement agreement, all joint accounts will need to be closed at some point. This in and of itself alone will ding a credit score, but it doesn't end there. Because if credit accounts are closed while there is still a balance owed, the damage is greater and impacts the score for a longer period of time. Personal Loans Having spent many years working in the world of credit and finance, I consider myself privileged to have been able to attend several 'industry professionals only' seminars held by one or more of the major credit reporting agencies. During these seminars we were provided with some insight into the scoring process, however; they were still cautious with how much they revealed about the actual credit scoring process, so while they did provide more information than what available to the general public, they stopped far short of lifting the veil of secrecy. Even though the information I provide in this guide is complied from my Equity experience working with credit management issues and the most recent and available information from industry professionals, it should not be perceived as perfect advice, but rather a guide, since the credit industry can and does make changes at their own discretion and often without any advance notification to the general public. Loans 2011 Lori A. Grover, NCPM, RI Mediation Center, LLC. All Rights Reserved
Consumer Accounts Cards The first thing to understand when it comes to managing your own consumer credit accounts is how the accounts are assigned which can be one of three ways: Individually, jointly or individual with an authorized user. When an account is opened jointly, the incomes and credit of both parties are considered and used to determine the credit limit for the account. If the account was opened individually and a spouse is added as an authorized user, the decision to grant credit is still based solely on the applicant but the spouse will also be issued a card in their name with charging privileges. Auto Loans In divorce situations it's not usually necessary to close individually held accounts however, joint accounts represent a joint financial responsibility and must be addressed during divorce negotiations. Since joint accounts are typically based on the combined income of the applicants, they are usually closed as part of the divorce settlement. In this case, if either spouse wishes to keep the account, they must reapply to the credit issuer and requalify based on their own credit and income. Mortgages Authorized user accounts gives the non-applicant charging privileges but without any contractual responsibility to pay the debt. These accounts, like individual accounts, determine credit worthiness and the credit limit based on the credit scores and income of only the applicant, but purchases made by the applicant and the authorized user will show up on both credit reports. Monthly billing statements will list only the applicant's name but purchases made by either party will appear on the billing statement. Personal Loans Installment and personal loans, personal lines of credit and auto loans are typically either joint or individual meaning the party or parties that signed the loan agreement are responsible for repaying the debt. These accounts are also based on credit and income so in most cases these loans will need to be rewritten or refinanced in the name of the party who is assuming financial responsibility for the debt. So in order to have a spouse's name removed from these types of accounts, the party who is assuming financial responsibility for the debt will need to qualify based on their individual credit and income. Equity Loans The difficulty, however, with personal loans, personal lines of credit or installment loans is that it can be impossible to reassign the debt to only one party due to income requirements, and in the case of auto loans, if the value of the vehicle is less than the outstanding balance, a refinance is usually not an option. So in order to untangle these types of joint debts, divorcing couples are either forced to pay the debt off, obtain other means of financing or in some cases when neither is possible, close the account if possible and continue to pay the outstanding balance jointly until the debt is satisfied. And the latter can present a challenge in the case of an acrimonious divorce. 2011 Lori A. Grover, NCPM, RI Mediation Center, LLC. All Rights Reserved
Mortgages and Home Equity Loans When it comes to home ownership there are two parts: the Mortgage Note and the Title. Most couples purchase their homes as joint mortgage holders and are also both on the Title to the property. The signers of the Mortgage Note are the ones financially responsible for the payment of the mortgage while the parties named on the Title are the property owners. If someone is just on the Title of a property but not on the Mortgage Note, they are not contractually obligated to the mortgage lender for the payment of the Mortgage Note but they are co-owners of the property. In this case the mortgage account and payment history will not appear on the credit reports of a Title holder since they are not also on the mortgage. Second mortgages and Equity lines (which are also second mortgages) are secured by the property's equity and work the same way. In many divorce cases one party elects to remain in the marital home. If only the spouse who wants to remain in the home is on the mortgage, there is no need to refinance the mortgage. When both spouses are on the mortgage, a refinance must take place solely in the name of the party who wants to remain in the home. There is no other way to reassign a mortgage obligation. As I have written in my Financial Foundation of guide, lending guidelines have changed dramatically in recent years, making it harder for divorcing individuals to refinance existing mortgages and those already divorced to purchase homes if their credit suffered in the process. Mortgages Equity Lines of Couples who have experienced financial difficulties and been unable to make their mortgage payments on time will see the effects reflected in their credit scores. This will make it more difficult for them to qualify to purchase a home on their own until the damage has been repaired over time. My advice to couples is that if you are experiencing a budget crisis, pay mortgages first before any other consumer debts whenever possible because mortgage payments are 'weighted' very heavily in the scoring process. Second Mortgages The length of time it takes to repair your credit history varies since credit scoring systems reflect patterns of behavior. So consumers who continually pay their obligations late will not see much, if any, improvement until payments are made on time, over time. A random or occasional late payment will typically cause less credit score damage than an on-going pattern of paying late. Home Equity Loans According to FICO calculations, a 100 point difference in your credit score can mean as much as $70,000.00 in extra interest payments over the life of a 30 year mortgage loan of $300,000.00 plus an additional estimated $60.00 per year in homeowner's insurance premiums. 2011 Lori A. Grover, NCPM, RI Mediation Center, LLC. All Rights Reserved
The Facts Figures Running into financial difficulties will cause your credit scores to take a hit to some degree. While some of these difficulties will only cause a minor ding to your credit, others can really drop your scores dramatically. Until recently, consumers have been totally in the dark about how credit scores are calculated, and still are, because so many factors combine to create a credit score, and each persons credit is based on their own personal financial habits. Below is a listing of some of the variables that create your magic numbers: Your payment history How much you owe How long your credit has been established Whether or not you are taking on new credit The types of credit accounts you have open The ratio of available credit to your credit limit Payment History Amount of Debt According to the Fair Isaac Corporation which developed credit scores, and VantageScore - the scoring model used by all three major credit bureaus: Experian, Equifax and TransUnion, the following are the biggest credit score zappers and how much each may impact your scores: New Bankruptcy: 165 to 365 points depending on the number of delinquent accounts and your score when it's reported. Home Foreclosure: 105 to 160 points A short sale mortgage: 115 to 140 points when selling for less than the outstanding balance and a delinquency was reported. Settling credit card debt for less than the balance owed: 64 to 125 points. 30 days late on a payment: 60 to 110 points Available Maxing out a credit card: 10 to 45 points. Limits While this information provides some perspective on credit score damage the actual impact will vary from consumer to consumer. For those who have high credit scores, they will take greater hits for each credit problem. For those with lower scores, a past risky credit history has already been factored into the equation. And according to Maxine Sweet, Experian's Vice President of Public Education, "You rebuild credit history which is then reflected in your credit score." Although late payments remain on your credit report for seven years, if you clear up all past due debts and pay on time, a credit score could improve more than 75 points in nine months according to VantageScore. In a Chapter 13 Bankruptcy, where you make partial payments over several years, the black mark can linger for seven years. A Chapter 7 Bankruptcy remains on your credit report for 10 years. 2011 Lori A. Grover, NCPM, RI Mediation Center, LLC. All Rights Reserved
Separating Joint Since we ve already discussed that separating your credit accounts from your spouse will cause a hit to your credit score, there are some steps you can take to minimize the overall damage and lessen the recovery time. First, as I already mentioned you need to determine whether accounts are joint or authorized user accounts which can be done by contacting the credit issuer. If any accounts are authorized user accounts, you can request that your spouses name be removed from the account(s) and no further action will be required. When accounts are held jointly, they should all be closed on the same date. This will potentially reduce the time frame it will take for all creditors to update your credit file, resulting in the updates taking place over a shorter period of time. Consumer credit profiles are typically updated on or around the 20th day of each month, so depending on the terms of your divorce settlement and whether or not a mortgage refinance will take place, any credit changes should be timed very precisely and with this date in mind. Let me use the following example as to why this is important. Let's say Mary is refinancing the home solely in her name, she has good credit, has met all the income requirements for the refinance and she and her soon to be ex-husband decide to close all their joint accounts prior to the lender obtaining Mary's final credit report. While the refinance is being prepared all the creditors of the closed accounts report the changes to the credit bureaus and without knowing it, Mary's credit scores have dropped as a result of those changes. The mortgage lender now pulls Mary's final credit report, at the time of the closing, and sees that her scores have dropped. Depending on Mary's score prior to closing the accounts, how many accounts were closed and how much her score was affected by the changes, Mary could potentially no longer qualify for the refinance. While this is a simplistic example, the point is that any activity on a credit report other than the normal updates that occur can make a big difference in a negotiated divorce settlement. Other actions to avoid whenever possible include closing accounts if they still have an outstanding balance, transferring balances to new accounts before home refinancing/purchase transactions have been completed and opening any additional credit accounts, unless absolutely necessary. Because credit profiles are so important during a divorce, couples must do their very best to handle their joint debts in a way that does not prevent them from achieving the results they negotiated in their divorce settlement. And the same careful attention should also be given to how auto and installment loans are separated, if necessary. 2011 Lori A. Grover, NCPM, RI Mediation Center, LLC. All Rights Reserved
Keeping Tabs On Your Once the dust has settled from your divorce, all joint accounts have been separated or closed, and any refinance or purchase transactions have been completed it will be time to check in on your credit. I recommend about two months after all is completed which should be enough time for all the changes to be made and give provide an accurate look at where your credit scores stand or where they are headed. What's important when reviewing your credit reports is to make sure that all accounts that were paid off as agreed, show as closed and paid with a zero balance. This is especially important if you filed a joint bankruptcy prior to divorcing. If you find any errors on your credit report they can be resolved by contacting the three credit bureaus, which I have listed below, with documentation as proof of the error. By law, the credit agencies must review your documentation and respond to your complaint in compliance with the Fair Reporting Act. They may also contact you for any additional information they may require to investigate and correct the error. This can take two to three months if the error can be easily corrected with the documentation you provide. In cases where accounts have been transferred from the creditor to numerous collection agencies, getting to a resolution can take longer, but consumers must remain diligent in keeping their credit reports as accurate as possible. As a rule, divorcing consumers should be diligent about checking their credit twice each year to make sure that the information collected and reported about them is correct, and also since identity theft is more common than ever before in history. Experian Consumers can access all three of their credit reports and scores plus utilize many great features to make the credit dispute/correction process easier at www.experian.com TransUnion Disputes can be done either by phone, mail or online at www.transunion.com. Equifax They also offer dispute resolution by phone, mail or online at www.equifax.com. 2011 Lori A. Grover, NCPM, RI Mediation Center, LLC. All Rights Reserved