Divorce plays havoc with emotions – and it can also play havoc with your credit.

If you and your spouse have an amicable divorce, settling financial and credit issues can be relatively simple. But as too many have found out, a “spouse scorned” can create financial problems that take years to solve.

The first step should be trying to separate your credit obligations. That begins with getting both credit reports and checking to see which accounts are held jointly and which are in only one name. When some accounts are held separately, look  to see which list the other spouse as an authorized user.

Removing an authorized user is the simplest of all the steps, and should be done by the account holder. If he or she refuses, the authorized user should contact the credit issuer in writing and ask to be removed. If they refuse, file a notice with each credit bureau.

Obviously, the reason for removing a spouse from your account is to protect yourself from “scornful spending.” An angry spouse can max-out your card and leave you to pay the bill.

Why do you want to be removed? Because if your spouse fails to pay that bill, it will show up on your credit report and could be factored in to your credit score.

If you have unused joint accounts – such as a credit card or a home equity line of credit – cancel them so that neither of you can obligate the other.

When listing joint accounts, or accounts which may belong to one but authorize use by the other, remember to consider accounts which may not be listed on your credit report – such as a doctor, dentist, or local retail store.

When a jointly owned home is involved, the spouse who stays should attempt to refinance in their own name only. However, if equity is involved, or if the “staying” spouse can’t qualify for a new loan on his or her income, selling the home may be the only safe alternative.

If you have other current joint accounts, the best course of action is to pay them off by opening new separate accounts and transferring the debt to each spouse according to the divorce agreement. But since income and credit scores often prevent this kind of division, the next best thing is to protect yourself by staying informed.

Remember – even though a divorce decree may deem one spouse responsible for specific debts, the creditors still consider both parties responsible if both parties signed the credit agreement. And in community property states, this can hold true even if only one spouse signed.

Thus, if joint obligations are divided between spouses, the divorce decree should include “what if” provisions for what happens if one of you can’t make the payment.

One common solution is the provision that you must be notified in advance, so you can make that payment.

You can also ask your lender to send you a duplicate copy of the account statement each month, or to give you access to online account records. The important point to remember is that when your credit rating is at risk, you need to know if the payments are being made.

Should you find that your spouse is not making payments as agreed and is putting your credit at risk, contact your divorce attorney immediately. The court will then step in and insist that your spouse pay your legal fees in defending yourself against claims from a creditor.

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Q:

Question: had a divorce. still have a lot of equity in my home 58%. have had good credit for a long long time 35+ years. total revolving credit $110K. have a problem. can’t sell home with ex. rented home. it will take 2-4 years for this to resolve. in the meantime I asked the largest ccard account I have for payment plan. FICO is 740-760 has been that way 20+ years.

what is better on credit report. closed ccard account with payment plan. or an open account with payment plan. I want to minimize impact.

called ccard company to arrange something in advance. they want me not to submit a payment so I show up in there system. Asked them is this collections at ccard company or a 3rd party. they hesitated but said collections at the ccard company.

I said I want to work with the ccard company I have been with you 35+ years and I fully intend to clear this debt.  they immediately agreed to zero percent interest. what’s the best way to handle this. they are telling me 5 years- zero interest which is good. but I do not know how that is reported and I do not know (i.e. if longer term on payment plan > 5 yrs is negotiable). I have 3 financial instruments with the lender. I have always made good on them but cash flow dictates I initiate payment plan on one of them. thank you.

A: Hi Mark, it sounds like you have credit card debt that is eating at your pocket book. My recommendation would be to check with some local banks, and see if you can get a loan at a lower interest rate to pay off these cards, so the interest is not killing you. Also you could look at reducing some other expenses to pay off the credit card quicker. If these two options are not a option, then I would go with the payment plan, but ask if they will report it as a payment plan and how it will affect your credit score. I would get something in writing from them on the plan you choose and how that will affect your FICO score. There no exact science with the bureaus in regards to how a payment plan will affect your credit score, but it will lower it because its a trigger that you are having issues. Avoid not paying your credit card, a late payment will destroy your credit scores.

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Q:I am very interested in building credit. I am getting married next year and want to get prepared. I make good income and am very responsible. I have a mortgage through PNC,and one minor credit card. How can I clean up my credit and take a diligent approach to cleaning up and approving my credit score?

A: Hi Ryan,

Here is a article we wrote a while back that will give you all the direction you need.

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Fifty years ago, when credit bureaus were local, almost anything could be in your credit file. In fact, credit bureau employees were paid to scan the local newspapers to gather information that the credit bureaus thought potential creditors had a right to know.

That might include anything from a drunk driving arrest to a divorce proceeding to a lawsuit over a property line. It might show that your spouse passed away or that you were hospitalized after a heart attack.

In short, your credit file was a gross invasion of privacy.

But that invasion of privacy is no more. Here’s a quick run-down on the personal information that your creditors and would-be creditors will no longer find on your credit report:

Your employment status. If you’ve lost your job recently, potential creditors won’t find out from your report.

Your credit report may list current and past employers – if you’ve listed them on credit applications. But it won’t show employment dates, or if that employment has been terminated.

Your income. This item was dropped back in the early 1990’s. Now your credit report won’t show income from your employment, unemployment benefits, alimony, child support or public assistance. Individual creditors will ask, of course.

Your arrest record. Credit reports today deal only with financial obligations. So if you were arrested for shoplifting or underage drinking as a teen, don’t worry.

The only time legal matters show up on credit reports is when they involve liens and judgments.

That means child support payments will show up as a debt, and if you’re given a fine and don’t pay it, it could show up as a collection. However, the reason for the debt will not be revealed.

Medical information: The Fair Credit Reporting Act prohibits credit bureaus from listing any information on your report that jeopardizes your medical privacy.

That means that in most cases, medical debt will not show up unless it goes to collections. Even then, it is listed merely as “medical debt” and no details are given. Often, doctors wishing to adhere strictly to privacy rules will report those debts under a company name that “does not appear to be medical.”

Your marital status: Contrary to what many believe, married couples don’t share joint credit scores. You each have your own. However, if you live in a community property state and your spouse defaults on his or her individual debts, those debts could be considered yours also. In that case, a collection action for the debts, could show up on your credit report.

Note: While credit reports lenders use will not show your spouse’s name, some versions will. Thus, the credit report you pull yourself may very well list your spouse.

Signs of a cash crunch: If you’ve gotten into a bind and had to take drastic measures to meet some obligations, don’t worry.

Your creditors won’t know if you’ve taken out a payday loan, pawned some valuables, or signed for a title loan on your car. If you default on one of those loans, that will show up on your credit report, but as long as you make repayment, no one will be the wiser.

Late payment of utility bills: This one depends upon your utility company, but in most cases, your late payment won’t show unless it goes into collection. The reason is that most smaller utilities don’t want to pay the fees associated with reporting to the credit bureaus.

Your net worth: What you’re worth is nobody’s business, so assets you own outright will never show on your credit report. This includes your bank accounts, stocks, bonds, and real estate you own with no mortgage. Even if you do have a mortgage, the value of your home will not be listed.

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Credit-worthy consumers are paying the price for the sub-prime market collapse, making it more important than ever to build and maintain high credit scores before purchasing a home.

According to FICO, the best rates and terms go to those consumers with all credit scores form the “Big 3” credit bureaus (Experian, Equifax, and TransUnion) at 760 or above. And close doesn’t count.

Even though a score of 756 puts you in a category where only 2% of consumers in your FICO^® Score range ever reach 90 days past due, you need those extra 4 points in order to qualify for the best rates. Earning them can save you thousands of dollars per year, depending upon the size of your loan.

How can you inch those scores up a notch?

Your credit report itself will give you some clues. Look for the section that tells you why your scores are as they are. The solution may be as simple as using a dormant account, or transferring part of a credit card balance to a different account, to lower the “use to limit” ratio on one card. Of course, paying down balances is always helpful.

Why use a dormant account? Because your score is based on your bill-paying habits. If you use the account, you can’t demonstrate that you make payments on time.

35% of your score is based on payment history, and you can’t change history. If you have late payments or other negative information, you’ll have to wait for time to lessen the impact.

But another 30% is based on the amounts you owe relative to what you could owe. And this is one area where you can take control. Strangely enough, this is calculated on a per-account basis rather than overall.

Thus, you could have six cards with little to no balance, but if one card is at 80% of it’s limit, your score will be negatively affected. Unless you can pay it down, it’s wise to move that balance to another card or cards to get your usage under 30% on all accounts.

15% of your score is based on the length of your credit history. Obviously, you can’t alter that. But you should be careful not to close an unused account that you’ve had for several years. Instead, use it occasionally to keep it active.

10% is based on “new credit,” and that includes the number of hard inquiries on the file.

A hard inquiry is one made for the purpose of making a credit-granting decision. It counts against your score even if you did not open a new account or take a credit line increase as a result. Inquiries you make yourself are not considered.

This portion of the score is the reason why real estate agents and mortgage lenders advise their clients not to apply for new credit cards or to allow any retailer or service provider to check their credit in the months preceding a home purchase.

The final 10% looks at the kinds of credit you use. For the best scores, you should have a mixture of revolving and installment debt. But if you don’t have it already – now is not the time to go open a new account.

For consumers, the frustrating part of all this is that we don’t know the formula. We can’t say that one specific action will raise (or lower) our scores by 3 points or 5 points.

Why? Because the formula looks at the overall picture and weighs the various parts against each other. And because the gain or damage for one consumer will be different than for another consumer, depending upon their credit score at the time.

For instance, a consumer with a low credit score and a history of 30-day late payments will be slightly penalized for a new 30-day late – while a consumer with high scores and a clean payment history will be penalized severely.

If the proposed QRM (Qualified Residential Mortgage) rules under the Dodd-Frank Act go into effect, standards will be even tighter. So if you want to buy a home,  start now to work on raising those scores.

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And what is QRM anyway?

QRM is short for Qualified Residential Mortgages.  Under proposed new federal regulations, loans that meet the QRM guidelines would be exempt from the Dodd-Frank risk retention requirement that a bank must retain 5 % of the risk when they securitize mortgages.

Banks would, of course, prefer to avoid retaining 5% of the risk, but since they do want to make loans, they are also opposed to the QRM guidelines.

These guidelines include 20% down payment, stringent debt-to-income ratios, and rigid credit standards.

Organizations such as NAR (National association of REALTORS®) contend that the new regulations would prevent millions of hard-working, creditworthy consumers from owning a home.

Why? According to NAR figures, it would take a family on a median income more than a decade to save the 20% down payment required for a QRM mortgage. However, if the economy turns around and prices begin to rise, that magic 20% could remain forever “just out of reach.”

Non-QRM mortgages (the ones that required banks to keep 5% of the risk) would be subject to higher rates and fees – which many believe would also put home ownership out of the reach of many aspiring home owners.

Regulators believe that the higher down payment requirement would reduce the risk of default. However, NAR and others in the Coalition for Sensible Housing Policy say that the true key to safe lending is sound underwriting and documentation – not the size of the down payment.

By way of illustration, they point to Federal Housing Administration and Veterans Administration loans. These both have low down payment requirements and relatively low default rates.

Ron Phipps, President of NAR, believes the proposed rule should be withdrawn and revised. Then it should be published for comment. A regulation calling for lending standards that ensures a borrower’s ability to repay and avoids product features such as teaser rates and balloon payments would do far more to lower the risk on mortgage loans.

Before swinging the pendulum too far toward preventing home ownership, regulators should step back and remember that it wasn’t sensible lending practices that caused this crisis. It was nonsensical lending practices that encouraged home purchases by consumers with no ability to repay the loans.

The Coalition for Sensible Housing Policy includes 46 organizations representing housing,  consumer advocacy, and banking. Of these groups, the National Association of REALTORS® is the largest, representing  1.1 million members.

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