Credit Report Issues During Separation and Divorce: Part II
By: Cynthia Robbins
Issues to consider after you review your credit report and find out that the accounts are accurate, but your FICO score is low:
Good news! There are always steps to take that can improve your credit report, but many may take time. Patience and perseverance are vital in determining what steps will help and hurt your credit score.
1. Are there any cases where paying off accounts can hurt your credit score?
It’s important that you seek advice from your attorney to determine what would be best for your particular situation, but be prepared to expect your FICO scores to drop when certain types of accounts are paid in full. This can be really frustrating and nonsensical, but knowing this may occur can help you determine what to do.
As tempting as it is to want the other party to pay you directly so you can personally pay off all the accounts, doing so may harm your credit score or cause it to drop temporarily. For example, when installment accounts such as loans, car loans, mortgages, etc., are paid in full, many individuals see their FICO scores decrease. However, when balances are paid down on credit card debt and no additional debt is accrued, FICO scores tend to increase. So, when individuals have lump sums to use to pay off debt, sometimes it makes more sense to maintain monthly payments on car loans, mortgages, and installment loans but pay off or reduce credit card debt as much as possible.
2. How can paying off and closing older accounts impact your credit score?
Unless you are advised to close older accounts, choose to pay off and perhaps close the most recent credit card accounts first if needed.
One factor in understanding your credit score is the overall length of your credit history. Accounts that are paid in full, not used, and either age or close may eventually drop off your credit report altogether, which can be frustrating when you’ve worked so hard to get these accounts to a $0 balance.
So, the strategy to adopt is this: You will want to keep accounts that are older open and in good standing for as long as possible. In some cases, when you make your last payment in a loan, such as a student loan or car loan, you will not be able to keep the account open – it will report as a closed account.
In other cases, though, revolving accounts such as credit cards can remain open indefinitely, provided you make your monthly payments on time or make occasional purchases using the card even though you are actively keeping a $0 balance. So, keep that credit card open that you may have first received in college, and don’t be tempted to close it just because you never use it now. It may make more sense for you to use it a few times a year or more to keep that account open so that the creditor doesn’t close the account due to inactivity.
3. How are accounts viewed when calculating your FICO score?
Maintaining a balance on several types of accounts and keeping them in good standing may help you improve your score over time. There are different credit categories, and having one or more of each can contribute positively to your credit score. For example, vehicle loans, real estate loans such as mortgages, installment loans, and credit cards are all typically considered different types or categories of loans.
When you can, strategize to keep different types of credit open and in good standing at the same time. If you are trying to improve your score, for example, and you have a mortgage, car loan, and three credit cards, paying off your mortgage and car loan may lower your score, but paying off the three credit cards first may raise your score. Maintaining high balances on your credit cards can significantly negatively impact your credit score than a high outstanding balance on an installment loan.
Reducing the balances on credit cards is usually one of the fastest ways to increase your score. So, paying off a $10,000 installment loan may lower your score, but paying off $10,000 in credit card debt may increase your score (assuming you don’t incur additional debt).
Sounds crazy! At times, for consumers, it is. But education and advice are really key as you make plans on what to pay off first and what to do when you have extra funds available to use for paying off debt. Always seek advice from an attorney and/or financial advisor when you are making decisions to move forward to improve your FICO scores.
4. Is there any way for me to see how different financial choices may impact my FICO score – positively or negatively?
Some credit bureaus offer online simulators to see how changes may raise or lower your credit score. Although these simulators are not guaranteed, they can provide valuable insight and education regarding the mysteries related to credit reports and FICO scores. Again, seek advice from a trusted advisor as well – once payments are made, and an account is closed, this decision typically cannot be reversed, so you’ll want to make sure this is in your best interests before moving forward.
To learn more about divorce, visit our Divorce Law page.
Related: Divorce Law
Cynthia Robbins is an Associate Attorney at WhitbeckBennett. She has extensive in-house experience working for both for-profit corporations and non-profit organizations. Ms. Robbins has worked in the United States, England, Singapore, and India. She especially enjoys legal technology and has gained over 20 years of experience working on various litigation support teams and completing discovery work through both traditional review methods and eDiscovery tools. To Learn more about Cynthia Robbins, click here.