After a Divorce, Pay Down Any Debt to Improve Your Ability to Obtain Credit
While you were married, chances are your credit cards, car loans, mortgages and other types of financing were established as joint accounts between you and your former spouse. Perhaps some accounts were also set up exclusively in your name or your ex’s name. Now that you’re officially single (or about to be), it’s essential that you establish or re-establish your own credit.
Your credit score will contribute to your ability to obtain new credit, plus determine how much you’ll pay in fees and interest rates. Right now, your credit score is somewhere between 300 and 850. While each of the credit bureaus calculates your credit score using a proprietary formula, the actual score that more than 70 percent of all creditors and lenders pay attention to is your official FICO score. This is the score calculated by Fair Isaac Company. It’s based on information within your three credit reports (compiled by Equifax, TransUnion and Experian).
According to Fair Isaacs, the national average FICO score is 723. Someone with a credit score below 620 is considered to have poor credit. A credit score between 621 and 720 is considered average, while someone with a score between 721 and 850 is considered to have excellent credit. Because they pose little risk, people with above average credit scores are the people who receive the best interest rates and lowest fees when applying for new loans, credit cards or financing.
Your credit score is calculated using a complex formula that’s based exclusively on information that appears within your credit reports. Six of the key factors that go into computing your credit score include:
- Your payment history and whether or not you have paid your bills on-time in the past. About 35 percent of your credit score is based on whether or not your creditors have reported late or missed payments on credit cards, car loans and mortgages, for example.
- The amount of money you currently owe. This includes credit card balances and outstanding balances on other types of loans.
- The length of your credit history. The longer you’ve maintained a good relationship with your creditors, the better. Thus, it’s important to keep older accounts that are in good standing open, even if they’re not currently being used.
- The amount of credit you’ve recently obtained. This includes the number of inquiries that have been made by creditors about your credit history.
- The amount of credit you’re currently utilizing, compared to your overall available credit or credit limits.
- Any judgments, liens, bankruptcies, charge-offs, repossessions or other negative information reported by your past or current creditors will be held against you when your credit score is calculated. Information about your salary, bank account balances, your investments, or the value of your other assets has no impact on your credit score whatsoever.
Your credit score changes as updated data gets reported by your creditors and lenders to the three credit bureaus every month. The easiest way to determine your official FICO score is to visit the MyFico.com website (www.myfico.com). There is a fee of $15.95 to obtain your FICO score and one credit report from you choice of bureaus.
Each of the credit bureaus also calculates is own credit score for you that’s based on information appearing within your credit report compiled by that credit bureau. You’ll need to pay a small fee (under $8) to obtain your credit score from each bureau, although this information is less important than your FICO score.
You may find that the individual credit bureau’s credit scores are up to 50 points or more apart from your official FICO credit score. Mortgage lenders, for example, will look at your median score (when comparing all of your credit scores). Credit card issuers and car loan lenders, for example, might only look at your score from one credit bureau.
The best thing you can do to boost your credit score is pay off outstanding debts (if possible), and pay all of your bills on time (even if you make just the minimum payment due on a credit card, for example) for at least six months in a row.
Your credit score not only determines your ability to obtain credit, but it also impacts your ability to obtain some types of insurance, and can be used by a potential employer to make hiring decisions. Thus, it’s important to do everything possible to protect your credit score and keep it as high as possible.
