Divorce Rich with Jacki Roessler, CDFA

Scaring Away Bad Credit Scores and Debt after Divorce

• Season 1 • Episode 21

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Can truly understanding your credit alter your financial future after divorce? Prepare to uncover strategies that could reshape your financial landscape.  In this episode, Jacki will  guide you through the complexities of maintaining and improving your credit score during and after divorce. This episode of the Divorce Rich Podcast will explain why your credit score is more important than ever, especially in securing loans, mortgages, and even job opportunities.  If you want financial freedom after your divorce, you need good credit. We'll discuss practical tactics for credit monitoring using tools like Credit Karma, all while keeping your score intact.

Jacki also shares practical insight and tips you can implement today to affect your credit rating. Lean into optimum credit card utilization, making timely payments and learn other factors that impact your credit. We'll explore how solutions like 401k loans and home equity loans can offer relief from credit card debt without further affecting your credit score. 

RESOURCES:

Visit us at https://www.roesslerdivorce.com/ to learn more about Jacki's practice and to find valuable resources for your case.

Speaker 1:

Welcome to the Divorce Rich Podcast. I'm your host, Jackie Ressler. I've been a certified divorce financial analyst for 28 years, helping clients and their attorneys navigate the often complex and confusing financial issues in divorce. If you're in the process of, or considering divorce, now is the time for you to take a deep breath and give yourself permission to find clarity on the financial issues you're facing. Rich means many things to many people.

Speaker 2:

I believe the best definition of being rich is someone who has access to many resources.

Speaker 1:

Along with my guests on this podcast, I will be bringing you a wide variety of information so that you can make sound and informed financial decisions for your financial future.

Speaker 2:

Hi everyone, welcome back to the Divorce Rich Podcast. This is Jackie Ressler, and I am doing a solo episode. Today, I am going to be covering what I would consider to be one of the foundational building blocks for financial wellness your credit score. Foundational building blocks for financial wellness your credit score.

Speaker 2:

When I was thinking about what kind of episode would be fun to record for Halloween, I was thinking about what scares people the most about money, and the scariest thing that I can come up with is your credit rating. That is something that comes up in a large number of the divorce cases that I work on, and even if you're not getting divorced or you were divorced years ago, your credit score can be a kind of a scary unknown entity. Did you know that divorce itself doesn't affect your credit rating? Unfortunately, however, divorce and damaged credit scores seem to go hand in hand, especially for women. So let's start at the beginning. Why does your credit score even matter? What difference does it make what your credit score is? Well, that is a good question. The reason why your credit score matters is it lets potential lenders know if you are credit worthy and whether or not they want to offer you credit or a loan. It's one of those, again, foundational building blocks of emotional and financial well-being to have a good credit score.

Speaker 2:

A good credit score also leads to financial freedom, and that's something that a lot of people that are going through divorce or are post-divorce that's something. Financial freedom is something that they are trying to achieve after the divorce. In fact, I think all of us would like to have financial freedom. So what does that mean? It means that you would be able to secure a mortgage. You can have your own home or condo with a good credit score.

Speaker 2:

You can refinance a mortgage into your name, which could be important. You can refinance a mortgage into your name, which could be important. Or you can step into a loan assumption If you want to keep your interest rate low and you're going through divorce. But you have to go through, you have to go through a credit approval process. Even renting a house or an apartment, getting a car, your insurance rates, even getting a job sometimes, will be affected if you have a negative credit score. So it is so important that this is something that you protect, and the good news is that, even though credit scores do go down typically after divorce, the good news is that you can actually do quite a few active things to get your credit score up, and it's not something that's probably going to happen overnight and that's okay, but it is also something that you can do on your own and you can continually work at.

Speaker 2:

So what I'm going to be talking about today is I'm going to talk about the places that you can go for credit monitoring because, just as with everything else in finances, understanding what your credit score is is the first step towards you having good credit, or a good again, a good financial sense of where you stand. So I'm going to talk about the best places to go to find your credit rating and monitor it. I'm also going to talk about the main factors that affect your credit rating, and I'm going to give you some tips on how to rebuild your credit or how to protect your credit if you are in the process of divorce or considering divorce, and then I'm also going to give you some tips on the best ways to pay down credit card debt if that's really negatively impacting your credit score. So what is the best place to go and find out what your credit score is? There are three major credit reporting agencies and you can go online and you are allowed to get a free report without it being a ding on your credit as a hard inquiry into your credit. I think it's at least once a year, but I never recommend that to my clients. You can go ahead and do that. You will get the full credit report that way, but the reason that I don't recommend that to clients is I strongly recommend an app that I discovered several years ago called Credit Karma. That's credit and then karma with a K, and Credit Karma is a free app. You can access it on your computer or on your phone and it will monitor your credit for you. It will pull your credit score daily, pulls information from the two major credit reporting agencies, but what's really great about it is that it will break down for you in English. If you've ever read an actual credit report, they're hard to read. They're pretty confusing. Credit Karma will break down for you the reasons why your score is what it is. It will break down for you the reasons why your score is what it is. It will break down for you the major factors that affect your credit score and it will explain why you're doing a good job, a fair job or an excellent job in each one of those categories and what kind of impact each one has on your score. So I love Credit Karma. I recommend it to everyone Every time I'm talking with a client about their credit score, one of the very first things that I recommend every client of mine to do when they come to me at the very beginning of their divorce is go to Credit Karma, open up a free account.

Speaker 2:

It does not count as a ding or a hard inquiry. These are all soft pulls on your credit, so it doesn't impact your score and it will. It will. It's such a valuable resource. It will also let you know how many accounts are opening your name, and I have had cases before where my clients don't know that their spouse has opened up credit or debt or loans in their name, which is a big problem. But again, knowledge is power and so Credit Karma it will. Also, it has a cool feature where it helps you model.

Speaker 2:

If you were to change this or this about your current credit, how would it impact your score? So again, love credit karma. So that's where I always recommend people start, and again to repeat the first step towards changing or repairing any damage credit is knowing what it is. So putting our head in the sand and pretending that we're not going to pay attention to that today, that's not going to help repair your credit and your credit is so important to your financial and, I would say, emotional well-being, having a good credit score and knowing that you are creditworthy and if there's an emergency, you have access to credit.

Speaker 2:

If you are in the process of divorce, what are some things that you should do to protect your credit today? One thing that you might want to do, so after number one, divorce Go to Credit Karma or a similar kind of app and find out what your credit is. Take a look at what accounts are open in your name and if you're aware of all those accounts. So that's number one. Number two is you may want to consider a credit freeze. So a credit freeze? It doesn't freeze your current credit. You're still able to go out and use your current credit cards and you still have your. If you have a car loan in your name or a mortgage, it doesn't change anything on your existing credit. But what it does is it doesn't allow creditors to access your credit report so they can approve new accounts in your name, accounts in your name and this is a really good way to protect yourself from your spouse or someone, someone else, stealing your identity and opening up a credit card in your name. So in the show notes for this show. It's really simple and easy. All you have to do is you. There's each of the major credit reporting agencies. You can contact them. You fill out a simple form and you say you want to freeze your credit. When you're ready to unfreeze your credit, you have to remember that you're going to have to go out and fill out those same forms again to unfreeze, but that would be one concrete thing that you can do to protect yourself.

Speaker 2:

Another thing that I always recommend to my clients is that if you have a debt in your name let's say that you have a Chase credit card account in your name and as part of the settlement, you want your spouse to pay off that card or to take on that debt that that any debt that is currently in your name that can't be transferred to someone else's name like that might be a car loan, any debt in your name that you be in charge of that debt getting paid off. Because you have to keep in mind that your judgment of divorce is only binding between you and your former spouse, it's not binding on third parties. So if you call up your, let's say you have a car loan and you're a judgment of divorce and it says your ex-spouse is required to make the payments. If the payments get missed, that's going to affect your credit and the car loan company. They are not going to care what your judgment of divorce says. They're going to say sorry. That's up to you. That's your problem. Our problem is you. You're the.

Speaker 2:

You are the one that signed for this loan, so you want to be the one to make sure that any debt in your name, that you don't give up that debt to the other side in the divorce without having a very clear plan of how you're going to handle it if a payment is missed. Once the payment is missed, it's already going to be reported to the credit reporting agencies. So again, highly recommend that you take on any credit card debt in your name. Even better, find a way throughout the divorce settlement process that you're going to pay off that debt. But again, you never want to depend on your former spouse to pay any debt in your name without there being a backup plan.

Speaker 2:

Another important tip that I always give to my clients is that we do want to make sure that that you know about all of the accounts that you have and I mentioned that before that again, you can find that on Credit Karma. It will list all of the accounts that are open in your name and those are again, a great place if you're in the process of divorce, a great place for you to go in and monitor and take some control over your finances during the divorce and confirm that there isn't any credit that you weren't aware of. I am always shocked at how many people have this happen to them, unfortunately. We talk about this on this podcast a lot. In a marriage, you typically are dividing up tasks. Both people don't sit down usually and pay all the bills together, and that's fine. But you always want to be aware of any debt that you or your partner are taking out, where your name is on that debt and again, it is so important that you have an awareness of that. So again, I can't cannot emphasize that enough.

Speaker 2:

So let's say we'll switch gears a little bit. Let's say that you already you went to Credit Karma. You already found out that your credit score has gone down. Maybe you're post-divorce. What can you do to repair your credit? So the biggest factors that affect your credit rating are your credit card utilization, late payments or payments that were not made. So let's talk about credit card utilization. You want to make sure that your credit amount stays at, let's say, 29% or lower Even better, 10% of the available credit to you. So that's even going to affect your score even better. So let me give you an example If I have $20,000 line of credit through American Express, I want to make sure that I don't have anything more than a $2,000 credit card balance during this cycle.

Speaker 2:

When every month there's a cycle where the credit reporting agencies they get information from all of the credit card companies or lenders on%, that's a big factor in your credit rating. Some of the factors are little factors. This one is not. This is a big factor. Another important point is that you want to make sure that you don't have late payments.

Speaker 2:

When you're getting divorced and you're feeling a lot of stress I understand that I've been divorced myself you can have a late payment. Sometimes you may be from the stress of the divorce. You forgot to make a payment on time. The best remedy for that in the future, of course, is to automate as many payments as you can If they're auto-debited out of your bank account, or some people have them auto-debited from a credit card and then they pay off that credit card every month. Auto-payments will help you consistently make your payments on time.

Speaker 2:

Once you have a late payment on your credit report, it's hard to get those off, and those again are those that have a big factor, depending on how many days delinquent the payment is. 30 days delinquent is certainly not as bad as 60 or 90 plus days. Those are two big factors. You probably you can't change any late payments that you've made, but you can start reversing that pattern and making your payments on time. In fact, if you're in the process of a divorce, I would say anything that reports to a credit agency, you make sure that that payment is made on time. So that includes your credit cards. Mortgage, home equity loan, car loan, utilities generally don't report to the credit agencies. I'm not suggesting that you make those payments late, but anything that reports to a credit agency, you protect that payment during the divorce. Do whatever you can to get that paid on time if it's in your name.

Speaker 2:

Another important tip is that the length of your credit history is another factor that impacts your credit score. So a big mistake that trips up a lot of smart people is that as soon as they pay off a credit card, they close the account. I would not recommend that you do that. You want to have a long credit history. The longer the credit history the better. So I'm not suggesting that you rack up credit card balances, but I am suggesting that you keep old cards active by charging a little bit on them and making sure it's paid off in full. But you want to keep those old cards active. You don't want to close those cards, which is a little bit counterintuitive. So I get why people think okay, I paid that debt off, I'm just going to close that account, I'm going to cut it up and I'm going to call the company and tell them I don't want it anymore. Keep those accounts open. Another common mistake that people make is that when they want to get their credit card utilization rate up, they think, okay, if I have more credit available to me, that's going to get my utilization rate below 30%.

Speaker 2:

Do not apply for a bunch of credit cards all at once, because those are all going to be hard inquiries on your credit and they do have a ding on your credit. Now a new hard inquiry on your credit generally will fall off within three months, so those aren't going to be long-lasting dings on your credit. But still, if you're going to be preparing yourself to, if you want to refinance a mortgage or take on a loan assumption and you're going to have to go through underwriting, make sure that you don't have within the past let's say nine to 12 months a whole lot of hard inquiries on your credit. So that might involve a little bit of pre-planning on your part. If your credit is very low or you have not had a credit in your name which many of my clients they don't have any credit in their name. Their credit was always in their spouse's name. The mortgage might be in the spouse's name. Car loans, credit cards, maybe they're authorized users. They don't have any credit in their name.

Speaker 2:

So if you are starting from scratch again, it's okay. So if you are starting from scratch again, it's okay. What you want to do is you might even need to get a secured credit card where you put money into an account and it's tied to a credit card and you spend it and then you pay it off every single month that you have, let's say, even $1,000 or $5,000 that you put aside in an account that's tied to your card, so that the lender, the credit card company, they know that if, if, if you don't have any credit history, they know that at least they've got that secured money there so they can pay off any debt if you, if you, miss a payment. I get to go under the hood of people's finances. On all of the cases that I work on and I work on client cases that are all different net worth types I have clients that have so much debt. Aside from the fact that they might have a very large income on the surface, they might look like they're pretty wealthy, pretty wealthy, but they have a ton of credit card debt, and it's in every single age group, it's. It's one of those things, again, that I think is so common in our spending culture and wanting to keep up with the Joneses culture.

Speaker 2:

Now is your opportunity to start fresh and get rid of those credit card debts. Again, you want to keep everything below 30% of your total credit available in terms of your credit card utilization, but even better than that, let's pay them off. So how do you get started on doing that? So the first strategy that I would recommend is what, in financial planning circles, we would call a waterfall strategy, where you take a look at all of your credit cards and you figure out which one has the highest interest rate Some of these cards. You're paying 30% in interest on these cards, so the first step is if you can't transfer them to zero balances and you can't pay them off in any way, you don't have any resource to pay it off. What you want to do is you want to take the card that has the highest interest rate and you make as many extra payments besides the minimum payments, all geared towards and focused on that one high interest rate card. All of the extra money goes there and then that will pay off that debt soonest. Once that debt is paid off, as a waterfall, it has the water dripping down. Now you move down to the second highest interest rate card and now you direct all your additional payments beyond the minimum payments to that card. Now you're still making minimum payments to all your cards, but that is one strategy that you can use to pay off that highest interest credit card debt sooner and again. Another strategy that I recommend to clients is that you set up your bank account to auto pay. Whether it's the minimum payment, you can set a dollar amount to auto pay on each card, but if it's debited out of your account, just like when we make retirement account savings or pay for health insurance out of our paycheck. If it's not there, we don't spend it. So that is another recommendation to just set that up as auto pay.

Speaker 2:

Now let's say again the best case scenario is that you pay off the credit card during the divorce process or soon thereafter. What are some places that you can go to that are better than having credit card debt, because they don't report to credit agencies or will help you overall. What are some places that you can go to that's resources of your own that you can tap into. One resource that isn't thought about very often is you can take out a 401k loan and pay that money back to yourself. So let's say you've got a credit card, you've got credit card debt. That is let's pick a number, let's say $35,000. You also have been saving diligently for retirement and you have a lot of retirement savings, but you don't want to take a withdrawal, because if you take a withdrawal now, you're subject to ordinary income tax on the withdrawal. Plus, if you're not 59 and a half years old, you're also going to get hit with a 10% penalty. So we don't want to do that.

Speaker 2:

Your, your retirement plan administrator, your 401k plan administrator. They are allowed to offer participants either $50,000 in loans or 50% of the total account balance, whichever is less. So my client has $35,000 in credit card debt. A lot of it is at 29.9% interest rate and their credit score is low. Because the debt is so high, cards are maxed out. So I would recommend that that client consider taking out a 401k loan of $35,000. They've got enough money in their account that they can do that $35,000 and pay off that credit card debt. So what would be the pros of doing that One?

Speaker 2:

Let's say that you miss a payment on that 401k loan which I'm assuming you're not going to miss one but if you did miss one or if you have a late payment, they don't report to the credit reporting agency. If you have a 401k loan, that's not going to get reported. That's good news. Another great thing is you are paying yourself back into your retirement account, so you have an outstanding loan. Any of the payments that you make back to that go into your account. That's invested and the interest goes back to you also invested and the interest goes back to you also. Those are some really big benefits for taking out a 401k loan to pay off credit card debt.

Speaker 2:

Now the next question is can I do that with an IRA account? What if I don't have a 401k but I have an IRA account? Can I take out a loan on that and the IRS says, unfortunately, no, you cannot take out a loan on your IRA account. However, if you have a 401k account with a small balance let's say you have a new job and your balance is small and you have a large rollover IRA your employer may allow you to roll money tax-free from your IRA account into your 401k and there might be enough there for you to then subsequently take out a loan against it to pay off credit card debt. So that's one option. It's my favorite option, really.

Speaker 2:

Another option for you would be to take out a home equity loan, especially in our current real estate environment where so many people have experienced an increase in the fair market value of their real estate property. But it's difficult to access all of that extra money. Well, taking out a home equity loan is another way that you can get a lower interest rate. Interest rates are still not like they were a few years ago, but a home equity loan interest rate let's say it's even 7%. That is so much less. You're already giving a haircut off of that interest that you're paying at 29%. We don't want you to be spending all of your hard-earned money on minimum payments and paying back interest and getting into debt that you can't get out of. Once you change that, that is a game changer in your steps towards financial freedom.

Speaker 2:

So I hope you enjoyed this episode and if you enjoyed this episode, I hope that you subscribe and follow on wherever you download podcasts. I would also love it if you would go over to Apple Podcasts and give this podcast a review. Those reviews make a big difference in how we get out to other people, and I want to get this information out to as many people as we possibly can who are going through, or have been through, a divorce and are trying to achieve financial freedom and financial and emotional well-being due to their finances being in control. Thanks for listening. Have a great rest of your day and happy Halloween.

Speaker 1:

Thank you so much for taking time out of your day to listen to Divorce Rich Podcast. If you like this podcast, please follow us on Apple or anywhere that you download podcasts and share this link with any friends or family that you think might benefit from this information.

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Jacki Roessler, CDFA

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