There’s an ancient Roman saying that a good reputation is more valuable than money. When it comes to becoming financially independent after a divorce, this rings especially true. A strong credit reputation will play a big part in your ability to establish credit in your own name post-divorce, including obtaining credit cards, securing mortgage financing for a new home, or even for renting an apartment.
The first step to knowing your credit reputation is to order your credit report. This is a list of the various debts, current and historic, that you have had in your name or held jointly, with details regarding your repayment behaviour. Are you a responsible borrower? Do you make payments on time or is there a history of late payments? Do you stay within your credit limits? Simply, how much can you be trusted to pay what you owe? Your credit report is used by potential lenders, landlords and even sometimes employers, to determine if, based on this past behaviour, you are responsible and likely to repay your potential future financial obligations.
You can order your credit report for free once a year by phone or mail from each of the two main credit bureau companies in Canada, Equifax Canada and TransUnion Canada. It’s a good idea to order one from each agency, as not all creditors will report to both. Review your report in detail to make sure all the facts are correct, and to protect your financial information.
Pay close attention to your name, address and other personal information; particularly if there have been any recent changes as a result of the divorce. And make sure that any debts listed, past or present, are accurate. It is your responsibility to report any errors or omissions to the agencies on the form they will provide you, and to follow up to make sure corrections have been made. An accredited credit counsellor or other trusted financial professional can help you understand the details of the report.
Lenders look at your credit score to evaluate your request for credit. Your credit score is a number ranging from 300-900 based on information in your credit report and it is used by lenders as a predictor of how likely you are to pay back your debts. The score is reached by considering a number of factors including your payment history, how much you currently owe (too much compared to your income?), how long your credit file has been open (newer credit will be worth less than established credit), how many times you’ve applied for new credit recently, the types of credit you have (consolidation loans, personal lines of credit, credit cards, etc.), and any collection items or judgements registered against you. For a small fee you can have your credit score included on your credit report, or you can ask a lender who will have recently accessed your report as part of their credit approval process to show it to you.
If your score is less than you would like it to be, or less than necessary to obtain credit in your own name, rest assured that it is possible to build your score back up over time and to improve your overall credit rating. Making all of your payments on time and in full each month will have a big impact. If you are not able to pay a credit card in full for some reason, making more than the minimum payment is a must. It is also important to keep your credit card balances below their limits. The old myth about maxing out your credit card each month to build your credit history is just that – a myth. In fact, you should aim to stay below 60% of your maximum credit limit on a regular basis. Consistently bumping up against your maximum signals to a creditor that you might be overextended.
Applying for too much credit within a short period of time also sends warning signals to a lender. Only apply for what you really need and keep credit limits reasonable. Cell phone contracts can help boost your score too, but not the month-to-month, pay-as-you-go plans. A secured credit card with a low limit can be a good way to start rebuilding your score as well.
A critical detail that can derail your financial reputation is any debt held jointly with your ex-spouse prior to the divorce. It is a common belief is that when the divorce papers are signed and sealed, all financial ties with an ex-spouse are severed. That, unfortunately, is not always the case. A finalized divorce does not automatically mean that any accounts or debts held jointly by two spouses are automatically divided or dissolved in the records of the lender. A lender will have made their original decision to approve a loan or credit card based on a joint application, taking into account the incomes and/or other factors of both parties.
Any agreement reached during a divorce might specify which party is now responsible for this debt, but until the documents are officially changed with the lender themselves, both parties remain liable. Any failure by the designated party to make payments will have an immediate negative effect on the credit score of the joint account holder. It is critical, therefore, to take that extra step to ensure that the lender’s records have been changed to reflect the new situation, that joint accounts are closed, and that only the responsible party is named as the debtor. This may require repaying the existing obligation in full and re-qualifying, but in the long run, both parties will be protected.
As you work to establish financial independence post- divorce, you can see that the details matter. Review your credit report annually and keep track of your credit score to know where you stand, and where you have work to do. Ensure that joint accounts and debts have been officially altered to reflect the terms of your divorce in order to protect your personal credit rating. If this is the first time you are handling your own financial affairs, take the time to build your credit history slowly and responsibly. If you already have a well-established credit history, protect it by ensuring that you continue your responsible behaviours. By taking these steps, you will ensure that your credit reputation will indeed be worth more than money.
[su_heading style=”default” size=”13″ align=”left” margin=”20″ class=””]Anne Arbour is the Credit Counselling Society’s Financial Educator for the Greater Toronto Area. Anne has over 20 years combined experience in facilitation and financial services, including operating her own small business financing company. Anne graduated with an MBA from York University – Schulich School of Business. She is passionate about promoting financial literacy in her community, about meeting new people and building strong working relationships. The Credit Counselling Society is a non-profit organization dedicated to helping consumers manage their money and debt better. CCS provides free, confidential credit counselling, debt repayment options, budgeting assistance and financial education.
To contact the Credit Counselling Society please visit www.nomoredebts.org or phone 1-888-527-8999.[/su_heading]