Divorces can get nasty. Very nasty. Even if you live in a community property state where everything, including your debts, is supposed to be divided up 50-50, it rarely works that way in practice. It can be the worse if you live in what’s called an equitable distribution state. When this is the case, kitty bar the door. This is because everything is negotiable including what happens to your joint credit card debt.
What happened to my friend
I have a friend who got divorced while there was $100,000 remaining on a home equity loan. He had promised to take responsibility for half of this and mailed his portion of the payment to her every month. The agreement was that she was then to make the payment using an automatic payment program at her bank. Unfortunately, she somehow muffed on a few of these payments. As a result her credit score dropped dramatically and so did his.
The net/net
Without getting into all the nitty-gritty, suffice it to say that he was ultimately able to persuade his ex to refinance that line of credit. Unfortunately she was unable to do so because of her low credit score. When my friend could no longer stand it, he discussed this with a friend who advised him to start managing both his and his ex’s credit.
Could not directly affect the outcome
My friend soon learned that 35% of a credit score is based on payment history or how well he and his ex handled their credit. There was nothing much he could do to affect that is except to keep reminding his ex-spouse that she should make her payments on time. But of course, he could not control this.
Credit utilization
A second important factor in computing credit scores is called credit utilization. In fact, this accounts for 30% of a credit score. This is an area where my friend could affect his score because was near the credit limits on all his credit cards. What he learned is that credit utilization is based on the amount of credit he had used versus his total credit limits. This is called the debt to credit ratio. For example, if he had total credit limit of $50,000 and debts of $30,000, his ratio would be 60%, which would be much too high. When my friend learned what a mistake he had made, he immediately brought his balances down to zero and his credit score increased dramatically.
Sent a note to the credit reporting bureaus
My friend next wrote to the three credit reporting bureaus and explained that due to a misunderstanding over automatic debits between his ex-spouse and her bank, there were a number of payments reported late to the credit bureaus over which he had no control. In a few months, his credit score was 776.
Didn’t help her score
Of course, this did not help her credit score because credit scores are not transferable. She needed to do a refinance of the loan but her credit was still stuck in the mid 650s. Beyond the late payments, her problem was a $7500 balance spread over a few credit cards that she was required to carry because she was unable to pay them off. This, of course, played a major part in reducing her credit score. My friend ultimately agreed to pay off his ex’s credit card bills and had her write the credit bureaus explaining about the late payments.
What he accomplished
What this accomplished is that my friend’s credit score increased, he is now in charge of his credit score and he and his ex are still friends.
Not for everyone
Don’t take this to mean that if you have credit card debt left over from a former marriage that you should rush out to pay it off. But it does mean that, depending on the circumstances, you and your credit score could both get ahead of the game if you were to pay off some or all of that debt.
