How to Build Your Credit in Divorce
Thank you for listening! Find a transcript of this episode below.
Depending upon your situation, you may be in a position where you don’t have much credit. And what is credit? Credit is, at least in this country, it’s a concept that … it determines whether or not, or how trustworthy you are in terms of receiving a loan, and a loan could mean many things. A loan could be something like an actual credit card, a loan could be a mortgage, a loan could also be a promise saying that you’re going to pay your rent. That’s a form of a loan.
Credit in the United States is a very important concept, because it affects a lot of things in your day-to-day life, and oftentimes you may not realize it. Let’s just start with a simple example of why credit’s important. If you’re trying to get a new home after divorce … I know some people who are trying to get a new mortgage or are trying to rent a home after divorce … well, one of the first things that anyone is going to do, unless you have all the cash upfront, and most people don’t, one of the first things people are going to do is they’re going to ask you for your credit score, and they’re going to ask you how your credit profile looks, to see if they’re willing to extend that mortgage to you or if they’re willing to rent you that home or rent you that apartment. They’re going to check your credit to do that.
Another situation is if you need a credit card. A credit card can be very useful. Even if you have the money to pay for things, a credit card can be helpful for your daily spending, and you pay it off each month. Or if you need to get a car loan. These are all things that depend upon your credit, and every person, if you have credit, is assigned a credit score, and they have a credit history that these different financial institutions or lenders will be looking at. But when it comes to the divorce situation, many of you might be in a position where you have very limited or no credit history, which creates a challenge.
The weirdest part about credit in this country is that it’s a chicken and the egg problem, is that you need good credit to qualify for a lot of things like a home loan or qualify for a good credit card or qualify for rent, but to qualify for those things you have to build up your credit and your credit history and credit report. I know some of you, if you did everything in your spouse’s name, might not have that detailed credit history, might not have had a credit card in your name, might not have had an auto loan, might not have had many of those things that, unfortunately, in this country are very important for your credit. And so when you’re in the divorce situation, it is now your time to start setting up these important accounts, and that also even extends to setting up your own bank account. While it’s not specifically a credit thing, it’s just as essential and closely connected to these items.
And so in this episode I want to discuss a few ways that you can build your credit, and we’re just going to start with some concrete action items. It takes time to build up your credit. I mean, it can take … There are some steps you can be taking today regardless of where you are, but some of these items will take months and years to generate a satisfactory credit history. But when I think about all things in the long term, you’re going to have to start doing it at some point, so why not start now?
One of the first things that you should do, outside of … The first thing you should do clearly is to get your credit report. There are credit bureaus. You get a free credit report from them. It’s becoming very common. Or you can go to websites like Credit Karma, but get your free credit report to see what accounts you may have, or if you have none, it’ll tell you that as well. But that’s a good starting point to figure out what your credit score is, what your financial picture looks like, at least from a credit perspective, and to start building your credit and improving your credit going forward.
One of the things that’s kind of most frustrating about the credit system is that in order to have credit you have to take out loans. That’s not the best thing in the world, but in order to build up your credit, that’s basically what you need in some forms. Now, the debt can be short-term, might be just a month or so, and you might pay it off every month, but that’s basically what’s required for you to build your credit. So one of the first things, after you get your credit report … I’m going to approach this from a perspective that you have no credit history at all, and I do have some clients that I work with on a regular basis that, even though they have assets and money, they don’t necessarily have a detailed credit history.
And so we’re going to pretend like you have none. If you already have a limited credit history or a great credit history, great. You can skip this episode or listen to some of the other specific things. But I’m going to assume you don’t have anything for the purpose of this episode, and I’m going to try and help you get on your feet. And so one of the first things you can do to start building your credit, outside of getting your credit report, one thing you do is you get a secured credit card or a credit card at all. Now, most of the time, if you don’t have a credit history, you’re not going to be able to get the American Express Platinum Card or the Chase Sapphire Preferred Card, which are some of the better credit cards on the market today, depending upon what your needs are.
You might not be able to get that immediately, but you can get something called a secured credit card. Basically, it means you give them some cash upfront, and they hold that cash onto you, and they give you a credit line equal to the amount of cash. So basically, if you were to give them $1,000, you pay them, basically, $1,000, and they say, “All right, well, here’s your great credit card. You can spend up to $1,000.” Now, you’re supposed to pay it off with other funds, but you can spend $1,000, and if for whatever reason you don’t pay it off, they’re just going to take that $1,000 from you and go from there.
Now, the thing about a secured credit card is, it’s a great starting point for building your credit. Now, it’s not a traditional credit card. A traditional credit card, you don’t pay upfront. You don’t give them money upfront and then pay them back later, but a secured card is nice, because it reports that you have credit. It’s a good way to say that, “Hey, yeah, I’ve been making payments. I have this credit line outstanding, and I’m starting to build trust.” So if you’ve never had a credit card before, you can look for a secured credit card.
Another thing you can try is look for store credit cards. So if you like shopping at an Amazon or a J.C. Penney or a Walmart or whatever else, they all have their own versions of credit cards. You might want to check those places and apply in there. They oftentimes have less stringent credit requirements. And then also, you can do a Google search for credit cards for people with limited or no credit history, and I guarantee you some credit cards will pop up.
Now, the downside to these types of credit cards is that, although they build your credit, they tend to have very, very high interest rates, in excess of 20%, meaning if you were to spend, using my example before, $1,000 and not pay off your credit card at the end of the month, they are going to charge you over the span of a year, they could charge you $250 in interest. That’s 25%. So you have to be very careful with these secured credit cards and some of these credit cards if you have limited credit history, because they can be very expensive if you do not manage them wisely.
The next thing you can do is you can think about becoming an authorized user on a credit card. So if you have someone who you trust, maybe a sibling, that would allow you to be an authorized user on a credit card or something like that, or a cosigner with you … Authorized user and cosigner are two very different terms. Authorized user just means that you get to use someone else’s credit for a credit card, but the person whose primary name is on the account is the person who is responsible for that card. A cosigner is a little bit different, in the sense that both people are equally liable for what happens on that card or on that loan. But in any case, you can try and become an authorized user on a card, or better yet, become a cosigner. Both require the person who is providing their name to really trust you, but it is a good way to start building your credit history, and you can get joint credit cards in those names to start building your credit.
Maybe you can try an auto loan. Another way to build credit is if you need a new car … “new” doesn’t mean necessarily the latest edition car, but if you need a different vehicle, you can try getting an auto loan. An auto loan, while it might not be the top tier auto loan, might be more expensive than traditional auto loans, if you’re paying your auto loan on time … Maybe you have to pay a bigger deposit upfront, which might happen, but they may allow you to get a loan, and as long as you keep paying that loan on time … I forgot to mention this earlier, is what happens with all of these credit accounts, whether it’s a credit card, a mortgage, an auto loan, all of these accounts get reported to the credit agencies. There are three big ones. If you just look up credit bureaus online, it’s a subject for another time. I also have some other episodes in the archives about this subject.
But it gets reported and says, “Hey, John Doe or Jane Smith has this credit line,” and each month they’ll say, “Oh, he or she’s been paying it on time,” or “not been paying it on time. Here’s their average balance, and here’s the credit score we’re going to calculate for them.” An auto loan could be a way to start building your credit, and so long as you’re paying the loan on time, then there are many car dealerships that are used to working with people with very limited or bad credit, and they can find creative ways to make sure that you get into a car. And so long as you keep making your payments, then you can start building your credit, and the more you build your credit, the more you will be eligible for other things down the line.
A cell phone plan. Getting a cell phone in your name is also a form of credit. Oftentimes, the cell phone companies will report your credit numbers, and that can be very valuable to you. You just make your cell phone payments each month, and they will report that information to the bureau. Here’s an example of how credit is used all the time in the cell phone world, is most people don’t actually go to the store and spend somewhere between 500 and $1,000 on that cell phone and then walk out of the store. Most of the time, people are spending … they might have a plan where they pay $25 a month until that phone is paid off.
Well, that $25 a month is a form of credit, and that’s how a lot of people can keep up with the latest generation phones, because they’re not spending $1,000 in the store. They’re spending the $25 a month for however many years until they’ve paid off that phone or until they trade it in for the next model. That’s a form of credit.
Another thing you can check is to look for a personal loan, get a small loan amount. There are lots of peer-to-peer or personal loans companies available for people to start building their credit. Now, the big downside to a personal loan is that oftentimes the interest rates can be super-high, particularly if you don’t have credit, but it is a way to start that process.
Now, when you go through all these ways to build your credit, you gotta be careful. You don’t want to have a bunch of debt outstanding, but you do need a little bit of credit to be able to get more credit and be able to live your life and function normally as you would often like to, or maybe as you were before, except now things are in your name. And so one of the things you gotta be really careful is make sure you don’t borrow more than you can, and don’t leave outstanding balances. So if you have a credit card that gives you $1,000 of spending, well, make sure that at the end of the month you actually pay that $1,000 back. Don’t keep that $1,000 outstanding and start paying that really high interest rate I mentioned before.
Don’t miss payments. You know, if you have a payment due on the 23rd of the month, make a calendar notification that it’s due on the 23rd, or better yet, set up auto-billing, so that automatically those payments get taken out. Even I had to set up auto-billing, because I have different accounts and things like that, and then you’ll go three days and start getting a bunch of phone calls, and you’re like, “Why is Chase calling me?” It’s like, “Oh, well I forgot to make my payment on time, just because I was busy, nothing else.” And so I switched to auto payments, so automatically they just pay the balance each month, and I don’t have to think about it.
And also, don’t spend too much. You know, just because you have the credit doesn’t mean that you have to use it. So if someone gives you a credit line for $1,000, you don’t have to spend $1,000 each month. You might just spend $100 of that 1,000 on groceries, and then pay it off at the end of the month, and that is just as good for you as you build your credit.
These are some things for you to think about, particularly if you have limited credit in divorce, and you’re trying to get back on your feet. The sooner you start these things, the better. You don’t have to wait until after the divorce is over. You should start these things today, and start building your credit, building your profile, and start getting to a position where … This is one of those things that’s a long-term process. Your credit’s going to be with you for the next decades, and so the sooner you start with this process, the better off you’ll be, because it’s a slow process.
And so even if you have a lot of other things that you’re trying to figure out, spend some time. I have applied, I’ve helped people apply for credit cards, where we get on the phone together or we go on the computer together, and we teach you. We go through what you need to put in for the different line items so you get approved for a credit card, to make sure that you start getting your credit. Or we’ll compare credit card offers together, so that you start making the right decisions and start getting yourself in good financial shape, both during the divorce process and as you go on with the rest of your life.