Concerned about your credit rating in divorce in Texas? You have good reason to be. Good credit helps with more than borrowing – it can factor into everything from renting an apartment and getting a cell phone, to landing a job. Lenders, landlords, utility providers, and employers can all review credit reports when making decisions about you as well.
It’s important to work closely with your attorney and a divorce focused financial expert as you walk through the maze of financial issues in divorce in Texas which includes keeping up with debt payments in the divorce process and determining the best financial action to take in divorce in Texas and after the divorce. Many find it helpful to walk through financial questions prior to mediation or settlement with a Certified Divorce Financial Analyst.
Let’s unpack what a FICO® Score is, and then walk through six practical tools to build or keep your credit score high.
A FICO® Score is a type of credit score created by the Fair Isaac Corporation. Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit. Lenders can request FICO® Scores from all three major credit bureaus (Experian, Equifax, and Transunion). A good FICO® Score means better financial options for you.
There are many reasons why your score may change. FICO® Scores are calculated each time they are requested, taking into consideration the information that is in your credit file from a particular credit bureau at that time. So, as the information in your credit file at that bureau changes, your FICO® Scores can also change
Not that you understand what a FICO® Score is, here are six factors that affect your credit score.
1. On-Time Payments
This is your track record for paying bills on time. This has the most impact on your score – in fact a whopping 35% of your score is simply from on-time payments. Missed and late payments, including the number of late payments, how late they were, and how recently they occurred, are important to FICO® Scores.
Creditors report your payment activity—good or bad—to the major credit bureaus, typically every 30 days. A single late payment won’t likely hurt your score, especially if it’s a one-time occurrence. Multiple late payments do affect your score though. Missing a payment on any bill affects your credit score negatively, including credit card bills, student loans, mortgage loans, and car loans. Other types of payments, such as your utilities or phone bill, don’t affect your credit score until multiple late payments cause the provider to turn your debt over to collections.
2. Credit Usage
This is how much of your credit card limits you’re using. This affects 30% of your credit score. FICO® Scores weight the balances of mortgage and non-mortgage installments loans (such as auto or student loans) against the original loan amounts shown on a person’s credit report.
That debt, also called your credit utilization ratio, is calculated by comparing how much debt creditors have extended to you—AKA your credit limit—to how much of the credit you’ve used. Say you have no loans and a single credit card with a $200 balance and a $1,000 credit limit, your credit utilization rate is 20%. It’s best to keep your credit utilization to 30% or less. But, keeping it at or under 10% is even better.
The reason debt has such a large impact on what affects a credit score is that it identifies whether or not you’re a high-risk borrower. Naturally, someone carrying less debt is a less risky borrower than someone who’s using quite a bit of his/her credit limit(s).
3. Average Age of Credit
This is the average age of all your open credit cards and loans. FICO® Scores consider the age of a person’s oldest revolving accounts. The longer and older your accounts the better so don’t close those old credit cards if you don’t have to and keep the ones in your name alone in your divorce. Keep them open and pay them off each month. Credit age affects 15% of your overall score.
When it comes to the age of your credit accounts, there are two main factors that a lender looks at:
• The first is the age of your oldest account.
• The second is the average age of your combined accounts—calculated by adding up the age of each account and dividing it by the number of accounts you have.
4. Total Accounts and Account Mix
The more credit cards and loans you’ve had, the more lenders trust you. Your credit mix accounts for 10% of your score. There are two main types of credit accounts that go into that mix, revolving debt—AKA credit cards—and installment debt—AKA loans, such as car loans and mortgage loans. Your credit score is happiest when you have a good mix of both.
5. Credit Inquiries
A “hard’ inquiry is when a lender checks your credit report. FICO® Scores look at the number of times a person applies for credit since people who are actively seeking credit tend to pose more of a risk to lenders than those who are not. Consider the impact of inquiries on your credit score before applying for any promotional offers.
The two types of credit inquiries as soft inquiries and hard inquiries. Soft inquiries don’t show up on your credit report. A hard inquiry does show up on your credit report and can lower your score in increments for some time before your credit begins to climb again. The fewer hard inquiries your credit report, the better. Hard inquiries, like account mix, make up about 10% of your credit score.
6. Odd Items
Reporting Errors
Errors can end up on your credit report and are items that are flat out inaccurate. They can happen from data entry mistakes or even identity theft. Watch from them by checking your credit reports annually. You can run one free credit report each year from each of the three major reporting agencies: Experian, Trans-Union, & Equifax at annualcreditreport.com. Another good option is Credit.com which includes a free credit report card that shows where you stand and what you can do to improve your payment history, debt usage, credit age, account mix and credit inquiries.
Other sites for a free credit score is creditkarma.com and creditscore.com The data won’t be exact, but it will give you a rough idea of where you stand.
If you do find an error on any one of your credit reports, be sure to dispute it with the credit bureau(s) reporting the error. If you have multiple errors, you need to dispute each one separately with the bureau reporting the errors.
Parking Tickets
Leave a parking ticket unpaid long enough and the city will likely send it to collections. Because collections involve outstanding debts, they can appear on your credit reports and do big damage to your credit scores.
Utility Bills
Similarly, unpaid utility bills can affect your credit score numbers negatively, when the debt is sold to a third-party debt collector. The third-party collector can report the account to the credit bureaus.
Medical Bills
Medical debts can directly affect your credit if you’ve used a credit card to pay for them. They can also indirectly affect your credit if your medical bills go unpaid, since health care providers also send unpaid bills to collections after a certain period of time, usually between 90 and 180 days.
Know though that medical debts are treated differently by most credit scoring models. Some newer models ignore paid medical collections entirely. And because of a 2014 settlement between the three major bureaus and 31 state attorneys general, since 2018, medical debt is not reported until 180 days after it’s incurred.
Delinquent Child Support
Unpaid child support is considered debt. And it can be reported to the credit bureaus by the municipality or agency responsible for collecting the payments.
Paying Off a Loan
If you pay off your auto loan and it’s the only installment loan you have on the books, your credit score can take a small hit. It sounds backward, but it’s how credit works. Closing a loan can also negatively affect your credit utilization rate if your remaining loan balances are high.
Closing a Credit Card
If you close a credit card you lose a part of your credit limit and your credit utilization rate changes—and not for the better. Your utilization goes up. And that can mean your credit score goes down.
Getting a new Cellphone Plan
Cellphone providers also often pull your credit when you sign up for a plan, which again can be a hard inquiry on your report.
Not Paying Your Taxes
Leave Uncle Sam’s annual bill unpaid long enough, and it might file a Notice of Federal Tax Lien against you. And a lien can seriously damage your score. Learn more about tax liens and how they affect your credit.
Forgetting to Pay Your Rent
For a long time, on-time rental payments did nothing for your credit. And, in many cases, they still don’t. But, the credit reporting industry is moving to include rental data on certain versions on your credit reports. And the industry lets landlords report payment data. Still, even if a lender or service provider isn’t looking at that data, a missed rental payment can wind up going to collections. And the collection agency might report your debt.
The effect can be positive though too. You can even ask your landlord to report your timely payments to help your score.
Also worth mentioning: Landlords tend to pull a special version of your credit report when you apply for a lease, so missing a rent payment could cost you a home or apartment, even if it doesn’t mess up your credit score.
That Old Gym Membership
An unpaid gym membership can wind up in collections, so it’s important to cancel the one you’re no longer using. Don’t just close or cancel the card you were using to pay the membership. Cancel the membership itself.
Bank Overdrafts
Checking and savings account information isn’t included in traditional credit reports. Even so, if you opt for overdraft protection tied to a line of credit and don’t resolve the overage, you could wind up hurting your credit score.
If this seems like a lot to keep up with, we understand. The emotions and family issues in divorce in Texas can be overwhelming alone, then add financial stresses and the process can be gruesome. Having a strong team to help you with the financial issues in divorce in Texas can provide peace of mind. For help with keeping your credit score up, building a credit history or financial assistance in general contact us to schedule a strategy session today!