When the Love Boat morphs into the Titanic and you are flailing in the icy waters of the North Atlantic, the banks are not rescuers, they're sharks. In other words, divorces can get messy -- sometimes really messy -- and it should come as no surprise that money is often at the root of the problem. Getting through the divorce is hard enough, but the money problems don't always end when the papers are signed. In fact, joint credit card and other types of debt can very easily outlive a marriage.
We've heard plenty of stories wherein an ex has damaged the former spouse's credit because of unpaid credit card and other debts. Here we look at one such cautionary tale:
As part of a divorce settlement, a friend of mine forfeited his equity in a home he had jointly owned with his ex, but couldn't wriggle out from under the $100,000 that remained on their home equity line. You see, creditors, like a spouse's divorce lawyer, are pretty old fashioned when it comes to the "till death do us part" thing.
So every month, my friend dutifully mailed his half of the minimum payment to her. She then made her payment through an automatic debit program at her bank -- or at least she thought she had. But she hadn't. She missed a few. Her credit score took a nose dive. His fell in lock-step with hers.
What does a hysterical ex-spouse do? As Monty Python would say, "Run away?" Well, basically, you have two choices: convince an unsympathetic lender to remove your name from the loan (achieving universal peace has a higher probability of success), or pay it off.
Casting for a Solution
He begged her to refinance. She was as unenthusiastic about that as the bank was about letting him off the hook. She needed reassurance that he would still stand up for his half. He agreed. They negotiated terms that protected her from nonpayment on his part, and she promised to refinance.
Unfortunately, a borrower's willingness to refinance does not guarantee a bank's willingness to approve a mortgage. As her credit score was a shade under 650, affordable refinancing was both unrealistic and unattainable. That "till death do us part after we part" thing raised its ugly head. So, every month he held his breath at payment posting time.
Finally, when he could stand the stress no longer, he sought counsel from a friend and opened himself up to the concept of pro-actively managing both his and his former spouse's credit. He looked at what actually makes up a credit score.
The 30% Solution
He learned that 35% of a credit score is based upon payment history. Other than making his payments in a timely fashion and reminding his spouse that it was in her best interest to make hers on time as well (a fact of which she was well aware), there was little he could do to directly control the outcome.
Then he focused on the next 30%: debt utilization. There was his opportunity.
He was running balances on a number of credit cards that put him almost at his credit limits. He thought carrying large balances, while making reasonable payments on time, would enhance his credit score because he was demonstrating that he could manage debt responsibly. Making on-time payments is in fact good for a credit score, but the closer you get to your credit card spending limits, the worse it is for your score.