The end of a marriage is hard enough emotionally. But being suddenly single can also bring huge financial challenges, including problems with your credit.
Here are five steps you can take to establish, protect or rebuild your credit after divorce.
1. Know how the credit-scoring system works
According to Fair Isaac Corp., the creator of the FICO credit score, your credit score is based on the following five factors:
- Your payment history (35 percent)
- The amount of debt you're carrying (30 percent)
- The length of your credit history (15 percent)
- The types of credit in use (10 percent)
- Inquiries or new applications for credit (10 percent)
So based on the breakdown, the best thing you can do that has the highest effect on your score is pay your bills on time.
"Always make payments on time, even if it's a minimum payment, because just one late payment can adversely affect your credit score," says Jordan Niefeld, a CPA and certified financial planner with Raymond James & Associates in Aventura, Fla.
2. Start small and build or rebuild credit gradually
If you didn't have any credit in your name because an ex-spouse had all the credit cards or loans in his or her name, you might be tempted to apply for a host of new cards.
Don't. A flurry of credit applications generates multiple inquiries on your credit report, which can hurt your credit rating.
A better strategy would be to apply for just one credit card. Most credit scoring models — including FICO and VantageScore — require you to have at least one account in your file for a credit score to be generated. The account must also have been open for at least six months and updated within that period in order for a credit score to be calculated.
Seek out a single, national brand card, such as a MasterCard, Visa, Discover or American Express card issued by a bank or credit union. Use the card regularly, but wisely, by routinely charging on it and then paying your balance in full each month. That way you build a credit history without amassing debt or accruing interest charges.
Even a credit card with a small or medium-sized credit limit (anywhere from $500 to $2,000) will help you establish credit.
3. Use nontraditional credit
If you get rejected for a credit card because you have a "thin" credit file or no credit at all, create a credit history by using nontraditional credit alternatives.
The best strategy: Apply for a "secured" credit card in your own name.
A secured card requires you to put up a cash deposit (usually at least $250 to $500) with a bank or another financial institution. That entity, in turn, will issue you a secured card that looks like any other credit card — complete with a MasterCard or Visa logo. The amount of your deposit generally becomes your credit limit.
Make sure that the secured card you choose is from a bank or lender that actually reports your payment history to the three main credit bureaus: Equifax, Experian and TransUnion.
4. Verify your credit status and notify creditors of your situation
John Piershale, CFP, at Piershale Financial Group in Crystal Lake, Ill., advises those separated or divorced to get their credit reports to see which credit cards are open in joint names and then notify the card companies about the change in marital status so the joint accounts can be closed or deactivated.
"This can prevent an ex-spouse from running up the balance and causing more financial challenges," Piershale says. "This also allows you to check your credit history for any mistakes and then work with the credit reporting bureaus to correct them."
Then closely monitor your accounts. "Divorces can start off amicably and then end up bitter. So you want to make sure everything is paid off and then closed," recommends Leslie Thompson, CPA and managing principal at Spectrum Management Group in Indianapolis. "It's important that all joint debt is terminated, through a refinance or by getting it paid off while married, because ultimately if joint debt exists after a divorce, both parties are on the hook."
If it's not possible to eliminate joint debt, Thompson recommends freezing joint credit accounts and sending letters about the divorce to those creditors as well as to all institutions where you have joint bank accounts. This way, it can help prevent either party from adding debt to credit accounts or withdrawing money from savings or other bank accounts.
5. Don't fall for promises of a quick fix
There are many companies out there that market themselves as credit repair firms and one-stop shops to fix all your credit problems.
If these companies suggest that you don't pay all your bills, or want to charge you large upfront fees, steer clear. "Those are all red flags that signal that maybe they don't have your best interest at heart," Niefeld says.