How to Rebuild Credit After Divorce
Getting divorced requires gaining or regaining financial independence. Some people go from living at home with their parents straight to getting married, perhaps with a few years of college in between. Some give up college or forego a career to manage the household and stay home with the kids. After divorce it’s time to buy a house or rent an apartment and reenter the workforce after a long period away, or for some to enter it for the first time. How do you do all these things if you don’t have any credit of your own to speak of, or if the divorce took away half your income, assets and good credit with it? Below we offer a few tips on establishing or rebuilding credit after divorce.
Understanding Your Credit Score
Your credit score, also known as your FICO score, is a number that ranges between 300 and 850. The higher the better when it comes to credit scores; anything over 670 is a “good” score, and over 740 is excellent. Your credit score is used when you apply for a loan or even rent an apartment because it shows the landlord what kind of payer you are, i.e., whether you tend to pay your bills on time. Regarding loans, your credit score determines what interest rate the lender will charge you and whether they will put additional requirements on giving you a loan, such as requiring you to purchase mortgage insurance. Having good credit not only helps you get a loan, but it also helps you get the most favorable rate.
Your credit score is maintained by three separate credit reporting bureaus – Experian, Equifax, and TransUnion. Your score should basically be the same across all three bureaus, although there might be slight differences. While you can order credit reports for a fee or sign up for credit monitoring services, you can also do this yourself for free. Federal law guarantees you one free credit report every year from each agency (see AnnualCreditReport.com). If you make a practice of requesting a report from a different agency every four months, you can monitor your credit report year-round at no cost.
One thing you will want to do after a divorce is remove yourself from any joint accounts you held with your spouse. As long as your name remains on the account, you are jointly responsible for it. Even if your ex is supposed to be paying the bill, their mistakes will cost you as well. If your ex gets the house or the car, make sure your name is removed from the mortgage or loan. Payment history – whether you pay your bills on time – is one of five main factors that determine your credit score (the others include the amount you owe overall, how long you have held accounts in your name, how much new credit you have applied for recently, and the mix of different types of credit you have).
Credit repair companies will offer to remove old or inaccurate information for a fee, but you can do this yourself without paying a third party, and some credit repair companies might not be on the up and up, so be sure to check them out with the Better Business Bureau if you decide to use one. Your divorce lawyer can likely guide you through the process of getting your name off joint accounts.
Ways to (Re)Build Credit
If you don’t have any credit history of your own after divorce, getting one or more credit cards is an established way to build credit. In addition to major credit cards, there are also department store credit cards, gas cards, etc. Be careful, though, because having too many open lines of credit or acquiring too much credit at once can be harmful to your credit score.
It can be hard to get a credit card on good terms if don’t have any credit or income history of your own. One option is to get a secured credit card until you qualify for an unsecured card. You can also apply to become an authorized user on someone else’s card, such as a financially responsible parent or sibling. You’ll get a card in your name that is linked to their account, but you’ll be building credit in your name when you use the card.
Once you have a card, you can build credit by using the card regularly and making sure to make at least the minimum payment on time. It’s okay from a credit perspective to maintain a revolving balance, but you want to make sure that it doesn’t get out of hand. Paying off your credit card every month is fine too and will help build your credit while keeping you from acquiring too much debt.
You could also consider a credit builder loan or secured bank loan. These methods allow you to borrow against your savings and build credit while doing so. The cost is that you will be paying interest on the loans, as well as fees in some cases.
As you move to an independent living situation, you’ll also get utilities in your name as well as a lease agreement. Paying your bills on time over time will improve your credit while failing to do so will hurt it.
Consider Asking for Alimony in Your Divorce
If it will take time for you to acquire the education, job skills or experience you’ll need to become financially self-sufficient, make sure your attorney knows to request alimony in your divorce. Alabama family law provides for several different forms of alimony, also known as spousal maintenance or spousal support, and some forms of alimony are specifically intended to provide financial assistance to help you become self-supporting. Permanent alimony is also an option for a former spouse who isn’t likely to become financially independent after a lengthy marriage outside the workforce. You can also seek temporary alimony while the divorce proceedings are underway so you can begin establishing your independent life even before the divorce is finalized.