When your marital status changes, something else changes that you may not have considered your financial and credit status. If you're asking yourself, "Is that important?" you need to continue reading.
Your credit history is important because it is the barometer creditors use to determine your willingness to repay money borrowed, as well as your ability to handle credit. While a good credit history can help provide financial freedom, a poor credit history makes it difficult to make major purchases now and in years to come.
Experiencing a major lifestyle change in the way of a divorce doesn't mean you have to sacrifice your good credit history. The Equal Credit Opportunity Act ensures everyone has the right to apply for credit without fear of discrimination on the basis of sex or marital status.
This doesn't guarantee that you will automatically be granted credit. It does guarantee, though, that you will be judged by the same standards as everyone else your "credit worthiness." The two primary factors in determining "credit worthiness" are your income and your credit record.
How Divorce Affects Your Credit Record
While you may or may not have control of your income level, you definitely have control of your credit record. For this reason, you need to know how a divorce affects a credit record and how to prevent possible credit problems through this transition period.
Both you and your former spouse are responsible for the payment of all debts incurred during your marriage.
First, the good news ... you are not liable for the separate debts your former spouse incurred before marriage or after permanent separation. But, both you and your former spouse are responsible for the payment of all debts incurred during your marriage. For this reason, when reorganizing your finances it is important not to let your emotions control your decisions.
Determine which debts each of you will repay, then write letters to each of your creditors asking them to transfer the debt to the name of the person agreeing to take responsibility for that debt. Creditors may not agree to do this until you prove you can handle the payments alone. That's okay. This is a great way to re-establish credit as an individual, as well as protect yourself from new liability.
During the divorce proceedings, keep your joint bills current, even if it means paying for your spouse. If you don't, it can hurt you. Creditors may become reluctant to release you from joint liability.
Once the divorce is final, close any joint accounts you and your former spouse may still hold and start to re-establish credit in your own name. This may not be an easy task once divorce splits your income.
Re-establishing Credit
To get started, establish a savings or checking account. Creditors look on them as evidence that you are able to handle money. Open a charge account at a local department store or apply for a gasoline credit card. These are often stepping stones to other forms of credit.
Remember, getting credit is only one step. Credit is not money, and it is not free, so use it wisely. One question consumers ask, sometimes too late, is "How much credit can I afford?" A good rule of thumb is to limit your consumer debt to not more than 20 percent of your net income excluding mortgage or rent. Yes, this does, however, include your car payment. Another way to determine if you are headed for a financial problem is to take the Consumer Credit Counseling Service Debt Test.
Understanding Joint Credit
An authorized signature is not the same as joint credit. Your name embossed on a credit card, for an account opened by your spouse, does not necessarily mean that a credit report for that account is being made in your name. If you did not open the accounts jointly, and you are only a singe, you are a financial nonentity until you prove otherwise.
On the other hand, if yours is the primary or joint name on any account that is delinquent, your credit will suffer no matter who has been taking responsibility for paying the bills.
Is your savings cushion inadequate or nonexistent?
Are you using credit cards for items you used to buy with cash?
Are you at or nearing the limit on your credit cards?
Are you unsure about how much you owe?
Is an increasing percentage of your monthly income going to pay off debts?
Are you only able to make the minimum payments on your revolving credit cards?
If you lost your job, would you be in immediate financial difficulty?
If you answer yes to two or more of these questions, or if you ever do, consider getting help. Consumer Credit Counseling Service (CCCS) is a non-profit organization that helps people prevent and solve personal financial problems. A CCCS counselor can help assess your situation to determine if you have a problem and the best way to deal with it. Counselors can help develop an individualized budget for paying off bills and planning future purchases. In addition, our counselors understand and respect ones' desire for confidentiality.
If the problem is severe, CCCS can establish and administer a Debt Management Program. [Debt {repaying}] Through this program CCCS enlists the cooperation of your creditors to reschedule debt payments. A certain amount of net pay is kept for living expenses, and another portion is sent to CCCS, which pays creditors according to the plan.
There are 1,000 CCCS offices in the United States, Canada, and Puerto Rico. CCCS services are provided free or low-cost to the consumer, and no one is turned away because of an inability to pay.
To contact a CCCS office near you, consult the business pages of your local telephone directory under "Consumer Credit Counseling Service," or from a touch tone telephone dial 1-800-388-CCCS (2227).
About the Author
M. Susie Irvine, B.S. in Consumer Economics, is the Director of Member Services for the Consumer Credit Counseling Service, National Foundation for Consumer Credit. Since 1978, Susie's professional involvement with financial counseling for individuals and families has moved from the local and state levels to national prominence. From Margorie Engel’s "Divorce Help Sourcebook.".
