Divorce & Money Category
Dear Liz: I just finished paying off my last credit card and checked my credit report as I am now separated from my wife. I found we had one joint account that she had not been paying. There are two stretches of five months each of no payment.
I immediately called up the creditor and paid off the balance and the creditor closed the account due to the lack of payments. This one account killed my credit score. I also found two old accounts on my credit report that are both still active but I have not used them for years. Both accounts are in good standing.
I was thinking that if I started using the accounts again, paying them off each month, it would boost my credit score faster. I am looking to buy a house this summer and would have an easier time with a better score. Do you think using the old accounts would help improve my score faster or do you think my score would be better if I closed those accounts?
Answer: Closing accounts can’t help your credit scores and may hurt them. You should avoid closing any credit account when you’re trying to improve your credit rating.
Your experience shows why it’s so important to separate financial accounts when you’re separating from a spouse. Failure to pay any joint account can hurt both parties’ scores. This would be true even if you were divorced and had a divorce decree making her responsible for the debt. Your creditors don’t have to pay attention to such agreements.
Lightly using a few credit cards can help you recover from missteps like this one. “Lightly” means charging 10% or less of their credit limits, and you should pay the balances in full each month, since carrying credit card debt doesn’t help your scores. You shouldn’t expect your scores to bounce back overnight, however. If you had good scores before this incident, it may take you a few years to recover completely.
Dear Liz: I went through a divorce in the last year after being separated for two years. During our separation, we closed credit cards with high balances to make sure neither party would spend more on credit. We also had to short sell our home. So, as a single woman in her mid-30s, I have credit that’s somewhat shot for now. How many months should I expect the short sale to affect my credit scores? And was closing the credit card accounts good or bad for my credit?
Answer: Closing credit accounts can’t help your credit scores and may hurt them. In a divorce, however, it’s usually wise to close all joint accounts. Otherwise, your credit rating is in the hands of your ex-spouse, who could trash your scores by paying accounts late or maxing out credit lines.
In any case, the short sale probably had a much greater effect on your credit than the account closures. Short sales typically damage your credit as much as a foreclosure, according to the company that created the leading FICO credit score. Recovery times are measured in years, not months. If your scores weren’t that high to begin with — say 680 in the 300-to-850 FICO scale — it would take about three years for your numbers to return to their old levels. If your scores were high, say 780, it would take about seven years to restore them to their old peaks.
These recovery times assume you handle credit responsibly from now on. That means having and lightly using a credit card or two, making all payments on time and ensuring no account goes to collections.
Dear Liz: I recently received a credit card to replace an existing one. The retailer that provided the card switched it from a Visa to an American Express. But the retailer also cut my credit limit to $1,000. My old limit was $10,000. Currently I have three other major credit cards with available credit limits totaling more than $10,000. My FICO scores are excellent and I always pay my balances in full. Could you please advise whether I should activate this new card or cancel it? Would it hurt my FICO scores if I cancel the account?
Answer: The new card is probably showing up on your credit reports already, whether it’s activated or not. If you were to close it now, you would risk hurting your good scores.
That’s not to say that you can never close an account. But if you’re trying to improve your scores, or you’ll be in the market for a major loan such as mortgage in the near future, you generally want to avoid closing accounts.
If you don’t activate the card, you might not receive the benefits that typically come with a co-branded retailer card, such as coupons and discounts. If you’re a fan of the retailer, you’ll probably want those goodies.
You might try contacting the retailer and letting it know that you’re unlikely to use the card because the credit limit is so low. Let the retailer know you’re concerned about your good credit scores, since you know you should use 10% or less of your card’s available credit to preserve them. That would mean any shopping spree would have to end at $100.
That might win you a higher limit, or it might not. If it doesn’t, feel free to substitute another card that treats you a little better.
Dear Liz: My spouse has extremely high credit card debt. All cards are in her name only. Where do I stand legally if she dies or we divorce? What can a person do about such uncontrollable abuse of credit cards? The interest alone is horrific, but she pays it.
Answer: If you live in a community property state and don’t have a prenuptial agreement, debts incurred during marriage are typically considered owed by both parties (even if there’s only one name on the credit card). Community property states include California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
In other states, debts incurred by one spouse are usually that spouse’s responsibility alone, unless the money was used to buy family necessities such as food or shelter. If you divorce, she probably would be responsible for these separate debts. If she dies, creditors could go after her separate property and may be able to go after her half of any jointly held property.
The rules vary enough by state that you’d be smart to consult an attorney about your potential liability.
Wherever you live, though, this debt is affecting your union and your future together. The money she’s paying in interest isn’t available for other purposes, such as saving for retirement or your children’s educations, plus it’s clearly causing tension between you. If you want your marriage to succeed, you should invest in sessions with a marriage counselor and a fee-only financial planner.
Q: I’ve been working at cleaning up my credit report, but a collection agency keeps changing the date on my oldest debts so they look more recent than they really are.
These debts are all more than seven years old and should have fallen off my report by now. But they’re still there, depressing my credit score. What can I do?
A: The tactic of changing delinquency dates on old debts is called “re-aging,” and it’s illegal. One collection agency, NCO Group, was recently fined $1.5 million for re-aging accounts; that is the largest civil penalty ever obtained under the Fair Credit Reporting Act.
Your first step is to write a letter to the credit bureaus that are reporting the inaccurate information. Make it clear that the collection agency has illegally re-aged the accounts and ask that the accounts be deleted from your files. Send this, and all other correspondence about the matter, by certified mail, return receipt requested. You’ll want to keep a good paper trail.
Unfortunately, the bureaus may make only a cursory check with the collection agency, which will probably insist that the information is accurate. You will then need to dispute the accounts directly with the collector, pointing out that re-aging is illegal and insisting that the agency provide the correct delinquency dates to the bureaus.
Debt expert Gerri Detweiler recommends sending copies of your letter to the Federal Trade Commission, your state’s attorney general, your U.S. senators and congressional representative and the Better Business Bureau in the city where the collection agency is located.
The collection agency “may decide they don’t want any more trouble and resolve it for her,” said Detweiler, founder of StopDebtCollectorsCold.com. “If not, she will need an attorney.”
It would be nice if you could solve the problem by paying the old debt. But that probably would make matters worse, because the payment would make the delinquencies look even more recent to the FICO credit scoring formula that most lenders use.
Besides, a collection agency shouldn’t be rewarded for using such sleazy and illegal tactics.