Divorcing couples often use their credit cards to pay attorneys and other professionals so these expenses can be tracked and divided at settlement. During divorce, credit cards can get “maxed out” to their limit. Divorcing couples are often concerned about the cost and the impact to their credit scores. They are also concerned about the ability to access credit once they settle their case.
To determine your credit score, FICO and other credit scoring companies look at your utilization rate — the ratio of amount you owe on your credit cards to the total credit available on the card. Typically 30% utilization is OK. Anything above 30% can hurt your score.
If you don’t have a credit score and your spouse’s credit is good, you may be able to apply for your own card while you are still married. To establish a credit history, use the card sparingly and make timely payments. As always, check with your attorney before making any financial moves once you’ve separated or filed for divorce.
Review can your credit report and scores at www.annualcreditreport.com. Be sure to repair any errors.
Is your Joint Credit Card Actually “Joint”?
Many credit card users are not owners of the card. They are “authorized signatories”. As an authorized user, your credit score is neither improved by past payments nor hurt for past delinquency. Before you file for divorce, call your credit card issuer to see if you “own” your card.
How to Increase Credit Availability: Jane and John
Here’s some advice you might not hear for your financial planner, except in the case of divorce: Don’t use bank or taxable investment accounts, home equity lines or other financial assets to pay down your joint credit card and lower your rate. Why? In divorce, accounts and property have yet to be allocated to each spouse. Using bank accounts and other financial assets could jeopardize access to liquid (cash) assets or increase payments after divorce.
Jane and John are divorcing. John wants to pay off the couple’s joint credit card because the rate is high, 15%. He suggested that the couple use availability under their home equity line, which as a much lower rate. However if Jane is awarded the home, she’ll take responsibility for the mortgage and the home equity line (as debt most often stays with the asset that secures the debt). If she is unable to refinance the home, her payments may exceed her ability to pay. This especially true when the only other assets to be divided in divorce are costly to liquidate, like retirement plans.
To increase credit available consider, if possible, talking to your attorney whether you should open new credit cards in your own name while leaving the joint card ‘maxed out” (assuming you can afford the minimum monthly payments until assets or individual credit lines or cards can be used to pay off the joint card at settlement). Use the card sparingly for personal expenses.
If your spouse cannot be relied upon to act responsibly, you could transfer debt allocated to each spouse in divorce to individually owned cards (or, if there is sufficient cash, use cash available to pay off balances) and close joint accounts. Again, check with your attorney before making any financial moves once you’ve separated or filed for divorce.
You’ll find some great, low rate credit card choices at www.creditkarma.com.
Should Jane and John Keep their Joint Card?
Close the joint card if you think you ex will use the card and/or cannot or will not pay their share of card purchases after divorce. MasterCard and other credit card companies don’t care about your divorce decree or who spent what money. Issuers will look to both spouses for repayment on a jointly owned card.
If either Jane or John are planning a major credit purchase (like a new home mortgage or car loan) then consider keeping the joint card open once it is paid off at settlement. Closing the account would reduce credit available to you, increase your utilization rate, and potentially hurt your credit score and thus the ability to make a credit purchase.
Silicon Hills Wealth and Divorce Planning of Austin work with clients and their attorneys to help insure that financial accounts are divided in the most efficient manner possible.
Neither Silicon Hills Wealth Management nor Divorce Planning of Austin do not provide tax or legal advice. Please consult with your tax or legal professional regarding your specific circumstances.
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