Under today’s economic conditions, especially with the job losses we’ve seen lately, many lenders and investors are choosing to raise minimum credit score requirements in an effort to minimize the risk of borrowers not being able to make their payments.
For now, the change in credit score requirements is simply a protection against default during a rough time in our economy. It’s uncertain as to how long the increased credit score requirements will last. But many of the big benefits of each loan program remain, while interest rates are still sitting at historic low levels.
Not only can divorce lead to emotional strain, but it can also cause all sorts of financial problems. All those shared accounts and co-signed loans that once seemed like a great idea are now the cause of major issues.
Don’t assume your clients will play nice and don’t assume they fully understand what happens with their credit during the divorce process. When joint credit is obtained, a contractual agreement is made to pay the bills. A divorce decree doesn’t change that contract. When clients divorce—each spouse remains fully liable for all joint debt as well as their new independent debt.
Understanding Your Credit and the Factors that Influence It
While the majority of divorcing couples have an understanding of credit, unfortunately, there are still those whose spouses ‘took care of all that stuff’ and they truly do not have the experience of working with credit and bill paying. This goes without saying; however, the majority of times this spouse was the wife.
Understanding the makeup of your credit score is the first step towards managing and improving it.
As you might expect, payment history is the most influential
component and this is followed closely by the amounts owed. To lesser degrees, the length of time that you’ve utilized credit, the number of new accounts or inquiries that may have and the various types of credit accounts that you hold will also have an impact on your score.
The overall importance of any of these factors can be further influenced by the entirety of the information contained in your consumer credit report. As such, certain patterns, occurrences or items can be measured differently depending on any other factor or combination. There can be great complexity in the way that the scoring formulas work and it’s for this reason that they are difficult to assess.
Managing your credit prudently will include the obvious, yet at times, the opposite is also true. In an effort to effectively manage your credit scores, always try and remember the following:
- Have and follow a system to assure that your bills are always paid on time.
- Avoid late payments or the excessive use of credit by establishing and maintain a cash ‘cushion’ to pay for unexpected expenses or repairs. It’s actually better to have a high credit limit with a low balance than to ‘max out’ your cards.
- Never close old accounts as the age of these can actually help and if you shop for credit, keep it to the shortest time period possible so that multiple inquiries are not counted against you.
- You need to have credit experience to have a credit score so don’t be afraid to use it, just be sure to keep it within your means.
- If you have established credit, don’t open new accounts solely for the sake of earning a discount on your purchases as in the long run, this can cost you much more in higher interest rates than you may save upfront.
- As well, too many accounts mean too many payments and this increases both the task of making those payments along with the possibility of missing one.
If at all possible, it is advantageous for both spouses to work together in maintaining existing credit histories. There are numerous opportunities to maintain strong credit through the divorce and take into consideration the above graph i.e., rather than closing a long-standing joint credit card, work with the creditor on removing the spouse that will not be liable for the debt. The length of time established is a key component of credit scoring. If one spouse is just an authorized user, simply remove that spouse’s authority allowing the card to remain open. Please don’t hesitate to contact me with any questions or for more information to have available for your clients.
Certified Divorce Lending Professionals are trained to look at all options and help remove as many hurdles as possible for both spouses who wish to obtain mortgage financing. The verbiage, or lack thereof, contained in the divorce settlement agreement can be an obstacle for either party going forward once the divorce is final. A CDLP’s goal is to help recognize these obstacles and set each party up for success.
Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.