Divorce and debt can be a dangerous combination, and if you’re not careful, they can be costly too. Divorce can wreak havoc on your credit score, making it very difficult to get credit in the future.
Jacqueline Shapiro is the founding member of Shapiro, Hurst, and Associates in Dallas, Texas. She’s been helping people work through their credit issues for over 25 years, and she is well-practiced in advising folks on what they can do to protect their credit score while also experiencing a more amicable divorce process.
- What is a credit score and why is it different on every credit card statement?
- How does a credit professional help people correct problems with their credit score?
- What are the biggest mistakes that people make with their credit score?
- What are the biggest mistakes that people make with their credit score in a divorce?
- When looking at joint debt in a divorce, if you’re the primary account holder, and the other party is an authorized user, you’re responsible for the debt, correct?
- What should people be wary of when it comes to the “credit repair” industry?
- When should somebody give a credit professional a call to help them think more strategically about credit?
- When you’re working with somebody on their credit rating, what are you looking at?
- How can we help our children and young adults gear them up for good credit in the future?
- When is credit important for our young adults?
- If somebody is struggling with credit right now, what message of hope do you have for them?
What is a credit score and why is it different on every credit card statement?
It’s such a point of confusion for so many people. If you’re looking at that bank credit report or going to Credit Karma, or you’re using one of a hundred different credit monitoring services out there, most of the time you’re getting a VantageScore credit score.
Now, when we work in “the real world” and we’re buying a house, or we’re buying a car, car insurance or a cell phone—all of these things are based on FICO. So, think of your VantageScore as a consumer credit score and FICO as a commercial credit score. It’s not that one is good or bad; they’re just different. Typically, not always, VantageScore is going to show higher than FICO. There can be as much as a 40-to-60-point difference between the two.
And not to make things more confusing, but there are actually 60 different versions of FICO.
So even though it says FICO, I’m still looking at a consumer version of the score.
Yes and no.
Let me put it into context: for a mortgage, the score’s going to be based on a 2, 4, and 5 version of FICO, but when you check the FICO that’s inside your credit card company or inside your bank, you’re probably getting an 8 or 9 version of FICO. Those are all variations. So, they’re always going to be different. And buying a car is different from buying a house, so that score’s different from what a credit card company pulls.
So, within FICO there are different calculations based on what you’re looking to purchase?
All of these different versions contribute to different things. My recommendation, when it comes to watching your credit score during a divorce is, first and foremost, to have a really great credit monitoring service. Also, you should be paying attention to the account information and making sure everything’s being paid on time, every time.
If something new pops up, get professional help. Don’t assume you can jump in and handle this problem yourself. You might make things worse.
How does a credit professional help people correct problems with their credit score?
Think of me as a professional problem solver. Credit reports are like kids; they’re all unique. Every situation is completely different.
- One person might come to me and say, “Okay, I want to buy this house.”
- Another person may come to me and say, “Unfortunately, I’m going through this horrible divorce situation. I need to strategically outline how I need to tackle this. How can I be smart about how to tactically address these issues?”
- Another person may say, “I want to buy a house, but I also have business ventures A, B, and C to deal with.”
Each one of those scenarios has a different personal goal and ideal timeframe that’s most important to that individual. I take that into account and then triage the credit report, so we can solve what’s going on, what we want to accomplish, and how we can make these things fit. I bring the conversation into context for that individual.
Can you give an overview of what that difference might look like and mean for some people?
I can’t take credit for calculating these numbers, but let’s look at good credit versus bad. We both know you can do a 0% interest loan on a car these days, but these numbers were calculated at 1.99 and 14.99. And, on the bad side, it can actually go up to 20%.
So, if you’re purchasing a $30,000 vehicle over five years, with that 1.99% you’re paying about $1,500 worth of interest.
But at 14.99% you’re paying over $11,000 worth of interest on that same vehicle.
If you were to just take a car, car insurance, and a home for the normal person—good credit versus bad can equate to about $9,000 extra per year being paid just because someone doesn’t have a good credit score.
Interest rates are increasing, so even people with good credit are seeing the rates rise. For those with a lower credit score, the risks are even greater.
It’s not just that. Sure, even a life event can cause poor credit scores, but from my experience, most of it is just a lack of education. Nobody’s teaching people how this system works and what they should and shouldn’t be doing. Some of this is common sense like paying your bills on time, but there’s so much more to the credit system than just paying your bills on time.
What are the biggest mistakes that people make with their credit score?
Let’s say somebody is restarting life after a divorce and everything is on an even keel. They have a normal credit score. They’re not a high achiever, but everything’s stabilized. Then the person thinks, Okay… I have to build some credit. So, they go open a credit card. Now, every time they go into JC Penney’s or they get a credit card application. they accept the offer. Then they wind up with 15-to-20 credit cards, which isn’t helping. These are simple things that we can think are common sense, but a lot of the time you can’t use the words credit and common sense in the same sentence.
The idea of opening a whole bunch of new credits to try and protect a credit score when you’re in the midst of a divorce is not a good idea.
Not a good idea! Another thing I see is unexpected collection hits. Maybe they’re in the process of doing something financial, and it pops into the credit report, and this is the first time they know anything about this debt.
They haven’t received any kind of legal notice of debt on the account, so this well-meaning person conducts this conversation in their head that says: Wow, if I pay this collection, it’s going to be better for me and my credit. It shows that I don’t owe anybody any money.
But the downside of that is an itty-bitty date inside the credit report called the date of last activity. Now, if that debt was five years old, and it was several thousand dollars, then the good person trying to do the right thing would think: I should call this company. I can negotiate this.
But here’s the problem—and this is especially true with any kind of company or debt collector that is less than honorable or working outside of basic integrity—the moment that well-meaning person calls and makes an agreement to pay or gives them a payment not only do you have a new last activity but in the state of Texas, at least for Texas residents, you just restarted the statute of limitations. Now they could turn around and sue you.
So, if you had just ignored it and let it slide, then it may not have been collectible?
Potentially. That’s where strategy and tactics come in, but that’s also where common sense goes out the window. Because it is common sense to assume you should pay this debt. Yet the better approach is to get it out of the credit report permanently. Let’s make sure you’re protected, that it’s permanently resolved and that there are no other surprises on the horizon because of a lack of education going into the conversation.
Very interesting. Of course, we’re not suggesting people should not be paying their debts. However, if you’ve got an old debt, you need to handle it strategically.
Right. My disclosure on this topic is: I’m not telling anyone don’t pay your debts or don’t make your obligations in any way, shape, form, or fashion.
What are the biggest mistakes that people make with their credit score in a divorce?
There are things you can proactively do to make the finance part of the divorce process easier for all parties involved.
If I sign a contract to buy a car, I’m financially responsible for the full amount of that contract. So, in that divorce process, the first thing to do is to get the account separated. If I had a spouse, and we had all this debt together, I’d want to know what’s in my spouse’s name and what’s in my name. Because, at the end of the day, you’re contractually responsible for those debts.
People don’t realize that. They think this is about “winning” so the other partner is responsible to pay the debt, but that’s not a win because that debt is still in your name. Furthermore, if the other partner doesn’t pay it, there’s very limited recourse.
The judge is going to say, “You’re responsible for this, and you’re responsible for that.” But when you sign that contract, you’re responsible to the company you signed the contract with, and it’ll have nothing to do with the decree whatsoever.
When looking at joint debt, if you’re the primary account holder and the other party is an authorized user, you’re responsible for the debt, correct?
That can certainly happen. An authorized user does not have financial responsibility. So that’s a good delineation between those two.
If you do have a joint credit card, it’s rare, but you could call the credit card company and ask for the debt to be assigned to one party specifically. They don’t do that very often because it’s a lot easier for them to collect the money if they’ve got more than one person on the line for it. Ideally, if you can have that conversation in advance and understand that simple fact of who’s responsible for what, then it can help in the process.
However, if you get into that scenario where the house is in your name, but the spouse is getting it and is supposed to make the payments, then I would make a sincere effort to make sure that that spouse can refinance into their name. Because, ultimately, the worst thing that could happen is you get past this divorce, and you’re three or four years into the future, and you fall in love. You want to restart your life with someone else, but now you have this mortgage that’s showing all these late payments that maybe you didn’t even know about. So, you want to buy a house…and guess what? You can’t do it.
It seems like it would make sense to put in a little note explaining the situation: My spouse was awarded the debt and didn’t pay on it. Does that do anything?
That’s not a thing, and I don’t recommend consumer statements in credit reports anyway.
Credit bureaus are only a repository of information; they will never take any responsibility for what they report. In terms of getting into that protection mode for yourself, please don’t co-sign stuff for your soon-to-be-ex.
Let’s take the finances and get those completely divided because when it comes to getting on with the new part of your life, your finances are a big part of that. Establish a clear line between what’s over there and what belongs to you.
If somebody has time to plan a divorce, maybe they’re waiting until the kids graduate from high school or college or whatever—it’s a good time to get proactive about your credit and to know what’s in your name and what’s joint and really work on dividing that out.
I think one of the biggest mistakes that I see is people doing during the divorce process will put debts in both their names. It’s very hard to disentangle because, ideally, at the end of the divorce, you want to be separate. You want to be on your own and not worry about whether your ex is messing up your credit score.
Yes. Getting everything divided out and having clarity in those conversations, when possible, is highly recommended.
What do people need to know and be wary about when it comes to the “credit repair” industry?
That’s a great question. If we were having this conversation a decade ago, I would tell you credit repair can be an amazing option for people. But today, my personal opinion is that I do not believe that the credit repair processes are really, truly effective.
I’m very lucky in that there are probably 60,000 people around our industry, and there’s a small group of about 60 that get an invitation to gather every year to discuss important issues. When we sit down, one of the things that get discussed is the credit repair industry. Ultimately, some of these peers are working in the credit repair industry. Now, I do not work in that industry. That’s like going to your doctor, and I’m more of a heart surgeon.
When it comes to credit reports, they’re working at a bureaucratic level. Generally, it’s designed to remove inaccuracies, and what we’re really seeing is that even if they’ve removed these negative inaccuracies, it’s temporary. Then things come back on, and people wind up getting very frustrated. I firmly believe that this is one of those things where you are truly going to get what you pay for. Most of the time credit repair services over-promise what they can deliver.
When should somebody give a credit professional a call to help them think more strategically about credit?
My clients vary across the board. We have a lot of high-profile clients and we have a lot of teachers down the street that we work with.
It’s very easy to set a plan. Most of the calls I get are “I’m supposed to close on this loan in three weeks, and this collection just popped in my credit report. I need magic done.” That’s where we really shine with those relationships that we’ve built over the years because, for us, it’s more pick up the phone, call, and navigate compliance appropriately. The problem is solved, and that person’s back on track and has a permanent resolution for everything.
A lot of times, I tell my clients, “Hey, you may not always like the answers I give you, but I will always be extremely transparent with you. I’ll be very direct. This can be done. This can’t be done.” And I think that’s lacking in most of those conversations about credit—somebody being willing to just be direct.
When you’re working with somebody on their credit rating, what are you looking at?
It depends on the type of client; it’s a very broad scale including everything from credit monitoring to mortgage reports and everything in between.
When I’m looking at a person’s situation. I want to know: What are your goals? What’s most important to you? What’s your ideal timeframe? Because that’s going to help me customize what needs to happen inside your reports.
Then I go through the reports in their entirety, just as if it was my own reports and I ask myself what I would do. I’m going to look at the scores. I’m going to look for optimizations. I’m going to look for problem areas. I’m going to look for ways to solve the problem areas.
Most of the time it’s just, “Hey, no problem. This can be done. This can’t be done.” If it’s ever a questionable item, I’ll tell you, “This is a 50/50, or this may be a Hail Mary.” It’s about breaking it down and having a very transparent and simple conversation so you can understand.
It feels like this is a health checkup. Making sure sure that they’re using debt in the most optimal way possible and that nothing crazy is coming out of the blue. Is that sort of how it feels? Like regular check-ins so you’re able to steer clear of the crisis moments?
I actually have a program inside my company that we call the 800 Club. When I, or a member of my team, break down a credit report for someone, we always make short-term, midterm, and long-term goals for our clients. Once they’ve accomplished those short-term goals, which are generally 30 days or less, then we work toward accomplishing those long-term goals.
I want all our clients to be at that 760+ score because that’s a high achiever. You’re getting the best rates, and you’re saving the most money. If you’re a member of our 800 Club, you have a professional in your credit reports every single month.
So, it is like a health checkup. Someone in our company can say, “Hey, the credit card balances are a little high, so keep an eye on those,” or “Hey, did you open this account?” or “You’re doing an amazing job. Keep doing what you’re doing; everything looks beautiful.”
So, when you go to make a big purchase or to do a deal to buy a new car, you’re running at optimum health. That’s great!
How can we help our children and young adults gear them up for good credit in the future?
I absolutely love this question.
This is my legacy project—teaching the next generation how to handle credit and basic finance questions. I’ll use my daughter as an example. I’m a military mom when it comes to this, and I’d always let my daughter know: I will never co-sign anything for anyone, but I’m going to make sure you have a beautiful credit score going into your young adult life. So, as she was coming out of high school, we sat down, and granted, she did have the benefit of a mom who could do a budget, but I said, “We’re going to learn how to do this together so you can take some of this knowledge into the adult world.”
Anyway, for her…
Step 1: Pull credit reports and credit monitoring. Let’s make sure everything is still a blank slate and that nothing nefarious has taken place.
Step 2: Get a small, secure credit card—something limited—and here’s how we’re going to manage it: You’re going to use this card twice a week to buy your lunch, and then it’s going to be on automatic payment to pay that $20 a month. We’re going to do this by opening a small installment account, which is really just a locked savings account. So, I made her get on the computer and physically do that; I walked her through the process.
Step 3: I added her to one of my long-standing credit card accounts with a high limit and perfect payments as an authorized user. I wasn’t crazy. I did not give my teenager my credit card. But for credit reporting purposes, having this perfect storm of accounts, in 45 days she was already at a 740.
So, you can do just a few very simple, basic things—outlined with expectations on how to use these accounts. Then, provide them with an education on these credit card offers. One of my friends started throwing the credit card offers in a box just to count how many, and there were 81.
It’s just crazy. They’re targeting these kids, and it’s a good way to get in a heap of trouble early on, and it’s really difficult to dig out of.
When is credit important for our young adults?
When they go to get their first apartment, or they go to buy a car—all of these things are going to be directly tied to their credit scores.
Now, because of their age, a young person’s always going to pay more for car insurance, but that doesn’t mean they have to pay more on that auto loan or get charged a huge security deposit just because they don’t have a credit score when it’s so easy to fix.
If somebody is really struggling with credit right now, what message of hope do you have for them?
If you’re struggling with credit, number one, know that everything you’re experiencing is completely temporary. So, don’t give up hope. It’s temporary, and we’re wherever you are today. So, take a deep breath. It’ll be alright, but you do need to call me to get a plan in place so that we can overcome whatever it is and get you on track.
Sincerely, help is a phone call away.
There’s no shame in this. This is a common problem that so many people have. We don’t talk about it, but it is, and it’s good to know you’re there.
This is one of those almost taboo things that nobody talks about, but I’m going to share a little secret with everybody. Absolutely everyone—myself included—everybody will have a credit issue at one time or another. It’s not if you’ll have it, it’s when it’s going to happen and to what degree. So, if it’s happening to everyone else, don’t feel embarrassed. Don’t have a hesitation about it.
I love that. There’s always a solution, and those things that we want to hide and feel shame about are only powerful when we’re hiding them. When we reach out and get help, then we can begin to change the trajectory.