Marriage, Divorce and Credit Scores – Lesson #5

Today we are going to talk about Marriage, Divorce and Credit Scores.

As if the credit scoring game isn’t hard enough to track with 3 scores per person, once you get hitched, you now have 6 scores to worry about. Many people think their scores merge when they marry. Not true. There is no such thing as a joint credit score. So face it, you have 6 Scores now. If you haven’t pulled all 6 of your scores do it now.

Your scores can become interdependent depending on how you handle credit.

There are many situations you could be in but all the scenarios take too much time, so we will go right to our recommendation. each of you should have your own personal cards and also establish some joint cards. These don’t have to be new cards; you can take one of your current cards and make it joint. Why do we like this setup? It means you have your own credit but share credit as well.

Financial experts will then tell you that you should try to use your personal cards for personal use and your joint cards for joint-community purchases.

If you came into the marriage with no credit cards, this is a great opportunity to establish credit of your own. Get your own cards, and establish a bank account. These are good things to do while you are married, as you can get an “assist” from your spouse’s credit.

Remember we discussed earlier how credit scores are looked at when getting a home loan and that often they take the mid score. So what do they do now when you are married? Answer: They often compare your mid score to your spouses and take the lowest one. Car companies usually pull one for each of you but they may take a similar approach if you both plan to sign for the car. They will likely go with the lower score, because it gets them a higher interest rate. Did you know that some car companies make most of their profit from financing?

Another option: if you have a higher score than your spouse and you can qualify for a better rate based on your income, with just your score, then just put your name on the loan application but put both names on the title. This way you get “community property” AND you get the best loan rate.

Divorce is hard. No way around this. We constantly hear stories of people whose credit was wrecked in divorce. So everyone wants to know what should you do with your credit when you get divorced?

When you divorce, you must contact each credit grantor and either close all joint accounts or convert them to individual accounts. Personally, I like converting accounts so you hang on to your credit limits. Let’s go back to our example with Jack and Jill, in this case Jack converts the Visa and Jill converts the Amex to an individual acct.

If you have trust issues, you should consider closing down the joint accounts completely. This way, what you end up with should like what you came to the marriage with, only cards that just have 1 name on them.

Why be so careful? Well finances usually get harder after a divorce.

According to the US Census Bureau, only 37 percent of custodial mothers receive the full child support payments they are due. Only 15 percent of all divorced women are awarded alimony, and more than one out of four never receive any of the awarded alimony payments.

Countless studies show that money is the biggest cause of marital stress and divorce, so follow our advice and check all 6 of your scores first, and setup your cards to lead to success. If you are going to monitor your score with a product like Score Watch, you should monitor it for both spouses.

Join us in the next lesson, which discusses Higher Credit Scores.

Biggest Credit Score Myths – Lesson #4

This lesson focuses on credit score myths. People ask a lot of questions about credit scoring. But, is it because it’s complicated? We think that one thing that makes it appear complicated is the vast number of myths that exist in Credit Scoring. Here’s our list of some of the biggest.

Credit Score Myths

1. Closing Credit Card Accounts Helps
   
2. Checking Your Credit Score Hurts You
   
3. Online Home Loan Shopping Dings You
   
4. Paying off the highest interest rate cards first is best for your score
   
5. Needless Disputing is a Good Practice
   

So, let’s tackle these one by one.

The first one is really one that’s counter intuitive. It seems like closing down credit card accounts should help your credit score but in fact, it doesn’t. This comes back to the credit utilization. You want your aggregate credit usage/credit limit ratio to be as low as possible. 20% is Great! If you are like me you have a few store cards that you never use. Just leave them open, but cut up the cards, or hide them in a safe place.

The second myth, checking your score hurts you, has a history. It used to be the only way to get your credit score, was from a lender, and when lenders check your score it’s for an application – so that impacts your score. So when the bureaus and myFICO started making scores available, they reached a consumer that was leery of the impact. The truth is, as long as you are not talking to a lender or credit card or other loan related company, you are fine. If you order from the bureaus, annualcreditreport.com or myFICO, you won’t impact your score AT ALL. Again, watch out for the broker with a free offer to pull your credit for you. He’s doing this to win your loan. This could hurt you. You can pull your scores safely by connecting through our links in our ads or links under the How To Get Your Credit Scores area to the right.

The third myth, online shopping causing numerous inquiries, is also historical. Pre-internet [caveman], you were likely to just use one lender for a loan, so someone really applying in multiple locations seemed risky. But even pre-internet, the folks at Fair Isaac had to figure out how to deal with someone wanting a second bid, so they created a 30-day window where all loan applications are treated as 1 inquiry. This is clearly a necessity in today’s world where consumers use websites like LendingTree and eLoan to shop for home loans. Incidentally, there’s a study out that consumers that get more than 1 loan offer usually get better rates. So shop around!  However, this 30-window only applies to home loans. Student loans, do not have this de-dupe inquiry feature.

Paying off the highest rate cards is best if you are trying to save money, and that will ultimately help your score. However, in the short term, if you are after higher credit scores, you want to pay off the highest utilized cards first. For example if you have 3 cards, a visa, a home depot and a pottery barn, it would make financial sense to pay off the pottery barn one first as in our example, it has the highest rate. But if it’s your score you want to impact, maybe so you can get a home equity line to payoff the cards completely, you want to pay off the home depot card as it’s impacting your credit utilization ratio the most and then the chase visa and work on the pottery barn one. Remember this is an example. Your first step will be to figure out what rates you have on your cards. The key here is, while the aggregate ratio here will not change at all, credit scores also look at your individual ratios.

One caveat, if you are NOT needing to use your score in the next 12-18 months for credit, then PLEASE pay off by interest rate first, you can always work on your score closer to when you need it. Got it?

Needless disputes are just that… needless. First off, what’s a credit dispute? If you believe information is incorrect on your credit report, you can dispute it with the bureau to have it removed. By law, they must verify with the creditor and if they don’t hear back, remove the item. But some people out there think that disputing correct info will succeed in having it removed. A] this is wrong b} it won’t work and c] did I mention this is wrong.

Don’t waste time trying to “trick” the scoring machine. That said, as I mentioned in an earlier lesson, the 2004 PIRG study pointed out that nearly 79% of credit reports have errors and that 25% are potentially score impacting. So, Take a close look at your reports to make sure everything is correct. Don’t waste time disputing your birthdate, if that’s the only item, but do dispute things you are sure are false, like a credit card you never owned, etc. Since most of us don’t like to write letters anymore, the Suze Orman FICO Kit has a nice tool to generate them for you. There are also numerous credit dispute letter samples in our resources section. Note that this can take some time to clear up. While the credit bureau is obligated to respond in 30 days, some back and forth may occur. It doesn’t happen overnight, but depending on your situation, it can be worth it.

We are always looking for more myths to bust, so if you have a good one send it to us at info [at] videocreditscore.com.