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Credit Scoring - The Unseen Financial Danger In Divorce
During the holidays, it is important for divorcing couples to restrain from excessively using credit cards if payments are ultimately destined to acrimonious negotiation, delays, or "held hostage" over custody arrangements. The increasing use of credit scoring by banks, insurance companies and merchants is proving a dangerous trend for many women, especially those in the midst of a divorce. Particularly vulnerable are women, who throughout their marriage had held credit cards, mortgages, bank loans and other credit lines jointly with their husbands. Not having worked for many years, they had not established an independent line of credit.
In my practice as a Divorce Financial Planner, I see women suffer disproportionately from the intensified use of credit scoring.
Here's a recent example:
Laurie had been married for 14 years. Her husband Joseph was the sole wage earner in the family. They jointly held all credit cards, loans, mortgages and an equity line of credit. Upset with her husband's infidelity, Laurie sued for divorce. Joseph is now "too depressed" to pay bills. He resents having to pay Laurie's credit card purchases and the mortgage on the house after he moved out. By the time the divorce is finalized, their joint credit rating has been severely affected. Without any past credit history in her own name, and the damage caused by Joseph's failure to pay bills, Laurie suddenly finds she can only qualify for the highest interest bearing credit cards. She has to refinance the mortgage, renegotiate homeowners insurance and reapply for auto insurance, all at much higher interest rates. The added interest costs dramatically increases her expenses beyond the budget that was used to determine alimony. Laurie faces the prospect of paying higher interest charges for years, because she had a poor "credit score."
Banks and insurance companies, among others, calculate a "credit score" based on a person's financial history, using a complex mathematical formula. The formula is kept secret, and measures the risk factors that a bank, for example, would use to determine whether to make a loan. Federal law, which requires credit reporting companies to give consumers access to their credit records, do not apply to credit scores.
Unknowingly, and through little fault of their own, many women face a bleak financial future, if her credit history, linked jointly with her husband, is suddenly blemished during the divorce. The husband may deliberately choose to withhold credit payments to punish the woman. Joint debts become delinquent and escalate out of control. With only a tarnished joint credit history and now marked with a "low" credit score, the newly divorced woman risks losing her existing policies and credit cards. She may find it nearly impossible to find alternatives at any cost.
It's happening today. The Wall Street Journal recently quoted one woman as saying that she applied for insurance at five carriers after being dropped by her original insurance company. Only two offered coverage, but at a rate of $250 a month, compared to $63 she had previously paid. Another woman reported that her auto policy was canceled because her former husband failed to pay bills after they were divorced.
Standard of Living Will Fall
Without independent means, a good credit score and/or steady support, a divorced woman will probably find that her standard of living will drop by 30 percent or more following her divorce. Because, compounding the problems created by the poor credit history, she may face inconsistent support payments going forward. According to the US Census Bureau, only 37 percent of custodial mothers receive the full child support payments they are due. Only 15 percent of all divorced women are awarded alimony, and more than one out of four never receive any of the awarded alimony payments. The emotional wear and tear of divorce plays havoc with their financial well being. Their troubled emotional state prevents them from making smart money decisions, decisions that will affect them for the rest of their lives. It's also not surprising that these women do not try to appeal their credit scores.
For all of these reasons, I believe it is necessary for attorneys to begin to take all these factors into consideration when negotiating the terms of divorce. They should start treating the cost basis and the continued coverage of existing insurance policies, mortgages and outstanding loans as being significant marital "assets" for the women who lacks independent credit standing. Many attorneys treat these assets as routine living expenses. I know many women who overlook, or naively decline to fight to keep these existing benefits, because of their spouse's professional relationship with agents, brokers and salesmen. In point of fact, the most important bargaining chip in a divorce may soon become who gets to keep what in whose name.
To avoid these dangers, as a Certified Divorce Specialist, I make a woman aware of this situation, and help her establish her own credit identity as soon as possible. We secure quotes for service and loan providers as needed. We obtain copies of all credit records to enable us to investigate credit accessibility issues before the divorce is finalized. Only this complete information enables a woman to realistically project expenses and negotiate, in confidence, their support needs.
The negative impact of the widening use credit-based scoring on divorced women, and others, has been recognized in several state legislatures. Washington, Utah and Idaho have passed laws that restrict the use of credit-based scores in issuing home and auto insurance. Legislation limiting credit scoring also is being introduced in twenty other states. Short of legislative relief, it is vital that women -- and their lawyers -- be made aware of the importance of establishing independent credit standing, and the often overlooked dangers of credit-based scoring.
In Connecticut, grounds for divorce may be no-fault, which means irreconcilable differences, or the traditional fault grounds of adultery, fraud, intolerable cruelty, imprisonment, confinement due to mental illness, and living separately for 18 months.
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