As I prepared to write this post, I wasn’t sure of the tone that I should take since I feel that I should offer my condolences to half of you while congratulating the other half. And although I believe that divorce is sometimes the right choice, I rarely try to advocate it. So I have to wonder if I am enabling divorce by creating a how-to list. Either way, if you are getting divorced, then you need to financially prepare for what is to come.

If at any point you feel that my tone is not appropriate considering the emotional turmoil that accompanies divorce, then simply understand that my purpose in writing this post is to help you with financial decisions. I am not a therapist or a shoulder to cry on. Please take no offense if I am to the point with my comments.

Complete and accurate financial records

Unfortunately, many divorce cases are fraught with deception. Further, it is not uncommon for the wage earner to have been hiding funds for years in secret accounts. Tax filings and W-2s help to establish how much money is coming in. Buy a banker’s box, hanging folders, and file folders (for organization) and make copies of everything. Hopefully, you and your spouse have been maintaining good financial records and all you’ll need to do is go to Kinko’s and start making copies. If you don’t have good financial records, then start going through old boxes or contacting employers, banks, etc.

Recording expenses during the divorce proceedings

You need to demonstrate what level of income is necessary to continue your normal lifestyle. This is very important if you are not the wage earner. For example, if you regularly buy gifts for family or enjoy eating out, then you need to establish a record showing that that is your lifestyle. If you go into the courtroom and just say, “I want $5000 a month,” without receipts that show that’s how much you normal spend, then you will have a difficult time getting that number.

Open new bank accounts and credit cards

As soon as the decision is made to get a divorce, then you need to open your own bank accounts and credit cards. This task may be especially daunting if you’ve never been very involved in your finances. As a side note, please always be involved in your finances. I’ve compiled a list of good articles and posts to read about banks and credit cards.

Bank Accounts

• Finding The Best Online Bank
• Find a Money Market/Savings or Checking Account
• Top Online Banks: Savings or Checking Accounts

Credit Cards

• Consumer Credit Card Offers Sorted By Benefit Type
• When Does It Make Sense To Use A Credit Card?
• 3 Reasons Dave Ramsey is wrong about Credit Cards

One last note about your financial accounts. Make sure that you have designated primary and contingent beneficiaries on your investment accounts and where possible, have a someone else on your bank accounts. If you were to suddenly pass away without adding beneficiaries and co-owners, then your money may find itself stuck in probate for a very long time.

Budgeting

During the divorce and afterwards, you will be solely responsible for handling your finances. Budgeting entails categorizing the areas where you spend your money and then setting a specific amount of money that you are allowed to spend each month within the various categories. Do not mistake accounting, which is just keeping a record of where you spent money, with budgeting. Budgeting is an active process where you limit your spending, thus requiring discipline.

There are a variety of online and desktop applications that help you create a budget and then track your expenses. I do not intend to list them all here since there really are quite a few options. However, let me strongly recommend using Mint.com, which is free. Mint is owned by Intuit and is therefore, well-funded and supported. For more info, read my review of Mint.com.

If you want to evaluate more options, then please read Budgeting Software: 13 Free Alternatives.

Your credit score and credit monitoring

In order to secure new credit accounts or a home, you will need to have a good credit score. Unfortunately, many Americans are unaware of what their credit score even is. First, a credit score and credit report are different. A credit report shows your credit history and a credit score is an indicator of how well you are able to manage debt or credit. You will need to review both.

Once a year, you are entitled to a free credit report from each of the three major credit bureaus. To obtain your report, simply visit AnnualCreditReport.com. Pull all three reports and make sure that everything is correct. Checking for errors is very important since your spouse’s bad habits may be credited to you.

If you have a particularly vindictive ex-spouse, then strongly consider signing up for a credit monitoring service that alerts you when something changes on one of your credit reports.

To obtain your credit score, create an account at CreditKarma.com. You can check your credit score as often as you like. For more information about Credit Karma, read Review of Credit Karma – 3 Essential Questions Answered.

Should you Rent or Buy?

If you are able to stay in your current home, then you can probably skip this section.

Many divorcees are forced to sell their home and relocate as part of the divorce settlement. If you are forced to move, then you will face the age old question – Should I rent or buy? The answer depends on a lot of factors, such as how much of a down payment do you have? do you have good credit? do you have a steady and stable income? how long do you plan to be in this location?

For some help navigating this tough decision, you can use the resources below (all three include a financial calculator).

• New York Times – Is It Better to Buy or Rent?
• Move.com – Rent vs. Buy Calculator
• SmartMoney.com – To Rent or to Buy?

Conclusion

Divorce is miserable. I don’t care if you are the one leaving or not. Divorce is just not pleasant. That’s not to say that you may not be better off, but anything that involves lawyers is bound to keep you up at night. Therefore, it is essential that you take care to financially prepare yourself for what’s to come and not spend additional sleepless nights worrying about areas of your finances over which you have control.

I came across Credit Karma about a month ago and decided to sign-up to evaluate the service. Basically, Credit Karma provides you with your credit score and an analysis of your credit report for free. I’m not talking about 30 days for free and then you pay “only $9.99 a month after that.” I’m talking about 100% free – forever. Well, at least while their sponsors continue to pay the bill.

The concept of Credit Karma is almost foreboding. The name itself refers to the fundamental concept of karma – what goes around comes around. Meaning, your actions today will affect your credit score tomorrow. So, can Credit Karma help you create some good karma? I’ve broken down my review into several key questions.

How is it free?

The service is completely free due to advertisers. Companies like Geico, Charles Schwab, and State Farm Insurance pay the bill for your credit score in order to place ads on the site. Meaning, no credit card required. One of the benefits of Credit Karma is that the ads/offers are targeted and voted on. By providing your information, Credit Karma determines which offers are most relevant to you. Further, members are able to vote on whether or not an offer is valuable. One important note is that Credit Karma will never disclose any personal information without your permission. Meaning, advertisers cannot determine who you are unless you sign-up for an offer.

I personally believe that the offers are valuable to consumers for two reasons. First, you have access to valuable credit information for free. Second, you are made aware of financial offers that you may not have otherwise known about.

What services are offered?

Here is a brief highlight of the main services that Credit Karma provides.

• Credit report card – Your credit report card is an analysis of your open credit card utilization, percent on-time payments, average age of open credit lines, total accounts, hard credit inquiries, total debt, and debt to income ratio (for more information on these areas, read this post). For each area, you are given a grade, A through F (I got a “D” for average age of open credit lines). This might bring back nightmares of grade school, but it also gives you a great insight into which areas you need to improve. Think of this page as your action plan.
• Credit score and snapshot – You also receive your credit score from TransUnion, which can be updated as often as you’d like. Credit Karma graphically tracks your score over time to let you know how you are progressing. My score jumped 16 points over the one month period! The credit snapshot is a view of how lenders view your credit score as compared to the national distribution of scores.
• Credit score comparison – This feature is just cool (though it may lead to an increased ego or just crush you). Your score is compared against all other Credit Karma users, just users in your state, users in your age group, and users that use your same email domain (I’m in the 76th percentile as compared to other Gmail users, argh).
• Credit simulator – If you are wondering how different actions will affect your score, Credit Karma provides 14 different attributes on which you can run simulations. So for example, how does adding a new credit card affect my score? Well, I checked and it decreased my score by two. Sorry American Express, no card this Fall. The 14 attributes fall into three general categories: Credit Limits, Payments, and Records.
• News articles, tools, and financial calculators – There is also a feed of news articles related to credit, tools, and a host of financial calculators.

All and all, I found the offerings to be very insightful and worth being served unobtrusive ads.

Does it affect my credit score?

Okay, so I’m very paranoid about doing anything that would affect my credit score unless I need to. So I emailed Credit Karma and asked if checking my credit score through them would affect my score. Here is their response, “No. Credit Karma is making the credit score request on your behalf. Inquires made on your behalf will not be shown to creditors and will not affect your credit score.” Meaning, check back often to see how your score and credit report are doing. You don’t want a mistake to go too long without notice.

Summary

I strongly advocate taking good care of your credit score since it has the ability to open and close doors (new home, new car, job, apartment, low interest rates, etc). Credit Karma offers an excellent service at a genuinely free price. Go check it out.

If you still have more questions, follow this link to Credit Karma’s FAQ page or email them.

(This post is featured in the Carnival of Personal Finance #219 – Little League Edition)

A few years ago, I was sitting at my desk at work when I received an email alert from Equifax. Concerned, I opened the email and found that a collections agency had just popped up on my credit report. My first thought was, “Who is trying to collect from me?” My second thought was, “There goes my credit score.” Since I hadn’t been contacted by the collections agency and I was unaware of any outstanding debts, I was left completely confused and wondering what to do.

An illegitimate collections account

After checking my report, I found the name and contact information for the agency. Since my first response to pretty much anything is to Google it, I immediately searched for NCO/Fin 99 (the name of the agency). The search yielded a lengthy list of complaints against the agency. Apparently, they had many reports of fraud and predatory business practices. Not wanting to be a victim of fraud, I spent time researching how to resolve the issue and remove the account from my credit report (which should be a high priority).

After following the advice that I received online, fighting the claim, and waiting several months, the collections agency decided not to pursue me and removed the account from my credit report. To this day, I have been unable to determine what debt it was that I allegedly had not paid.

Steps to resolving a collection account

I have outline below the steps that I followed to have the delinquent account removed from my credit report. If a collections account happens to surprise you one sunny afternoon, this same process should help guide you through remediation.

1. Obtain as much information about the company and debt as possible. For example, you will need at least the name and mailing address of the company, the amount of the debt, and the account number. Your credit report should contain all of this information. Other useful information is the original creditor (helps you determine if the account is legitimate).
2. Write a letter to the collections agency requesting verification of the debt and that they cease attempting to collect the debt until verification is provided. I have placed below an example letter that you can use. Just fill in the blanks, sign, and send it off via certified mail and return receipt (you want to have a record that you have contacted them).
3. At this point, the agency will either stop pursuing you and remove the account from your credit report or send you verification of the debt which should include additional information.
4. If you receive verification of the debt, then the next step is to negotiate settlement and the removal of the account from your credit report. You do not want the account to linger on your report and damage your credit score. Contact the agency via phone or certified mail telling them that you are willing to settle the debt if they remove the instance from your credit report (this request is known as “paying for deletion”). Once they agree, try to get the agreement in writing.
5. Next, pay the debt. I am not advocating or telling anyone to avoid paying debts that are rightfully yours. If you incurred the debt, then take responsibility and pay it. Having said that, try to negotiate with the collections agency to reduce or remove any late fees or interest penalties so you only owe the principal amount.
6. Monitor your credit report to see if the account is removed. If you find that the account has not been removed, then dispute it directly with the credit bureau letting them know that the situation was resolved and the collections agency had agreed to remove the account.

A legitimate collections account

Recently, I received another notification that I had a collections account on my credit report. Knowing the hassle I had had several years ago, I expected more of the same. After sending the validation or verification letter, I received notice that I did indeed have a past due debt. Three years earlier, my wife (fiancé at the time) had illegally parked my car and received a parking ticket. We were married a short time later and forgot about the ticket in all of the excitement. We now owed over $100 for a $30 ticket. My wife called the agency, explained the situation, and they reduced the amount to $60. They also agreed to remove the account from my credit report. We happily paid, the account was removed, and my credit report remains clean of any blemishes today.

For more information on how your credit score is calculated and how you can increase or maintain it, read “How I had an 800 FICO score at age 24“.

Example Validation or Verification Letter

[Date]

[Company Name]
[Street Address]
[City, State Zip Code]

Re: Account Number: [Account Number]
Amount of Claimed Debt: $[Amount]

Greetings:

I am writing to give you notice under the Fair Debt Collection Practices Act that I dispute the above-referenced debt and request that you verify it. I also request that you provide me with the name and address of the original creditor and copies of all documents which pertain to the above-referenced account and the alleged debt.

This letter shall also serve as a reminder that you must cease collection of the debt, or any disputed portion thereof, until you obtain verification of the debt and the name and address of the original creditor and mail that information to me.

Thank you for your prompt attention to this matter.

Sincerely,

[Your Name and Sign Above]

While doing a bit of car shopping a few years back, the car salesman asked my wife and me if we had had a loan before, if we knew our credit score, and how old we were. We told him that we hadn’t had a car loan or mortgage but that we had excellent credit.

A few minutes later, we were told to speak with a new salesman. When I asked the new salesman why we had been handed off to him, he told us, “I’m the guy that helps people with poor credit.” At that point, I about walked out the door. Just because we were young and “appeared” to have no credit history, this salesman assumed we had poor credit and never would have suspected that I had a credit score of 800 and would have no problem credit qualifying! Now mind you, I was 24 at the time.

On our way out the door, I spoke with the original salesman and expressed my frustration with being reassigned to the “poor credit” guy. When I told him my score, he asked how I had ever managed that.

So what did I do, and what can you do to increase your credit score?

First, you need to understand what the credit agencies are considering. There are essentially five factors with corresponding weights that determine your credit score.

1. Payment Record (35%)
2. Total Amount Owed (30%)
3. Credit History (15%)
4. Application History (10%)
5. Credit Mix (10%)

As you look at that list, keep in mind that the objective of each credit bureau is to generate a number that tells a creditor how safe they are when extending credit to you. In other words, your past and current behavior indicates how likely you are to repay the borrowed amount on the agreed schedule. Now let me explain what each area above entails and what you can (and should) be doing to help boost and maintain your credit score.

Let’s dive deeper into each factor of your credit score

Your Payment Record shows how consistently you pay your bills on time. As you can see, this is the largest factor when determining your credit score. Creditors want customers who they can expect to always pay the bill by the due date. So what we are really talking about is your self-control. If you have enough self-control to not overextend yourself, then you will be able to meet your current and future obligations. If you do not live within your means (i.e. spend less than you make), then you will have a poor payment record showing late payments.

Let me give you quick tip if you do have some late payments showing up on your credit report. First, speak with the creditor about having the negative information removed from your credit reports (assuming you have reconciled with the creditor). If you have a single blemish, then they are usually pretty willing to work with you. Second, appeal directly to the credit bureaus to have the late payment information removed, especially if there was any mistake on the part of the creditor. For example, Old Navy once didn’t send me my monthly statement. I didn’t think anything about it until the next month when I found out I had a late payment due. I spoke with Old Navy, made the payment, and reconciled everything with them. Sometime later, I discovered the late payment on my credit report. I disputed the late payment with the credit bureau by explaining the situation in about 50 words and the late payment was promptly removed from my credit report.

Second, your Total Amount Owed is an indicator of your current ability to meet future obligations. For example, someone who has $1,000 in debt is probably more likely to be able to handle additional debt than someone who has $10,000 in debt. You should consider your total amount owed by calculating your ratio of credit used to total credit available. So, if your total credit limit (once you add up all of your credit limits) is $20,000 but you only have $2,000 in used credit, then your ratio is 1 to 10 or 10%. Again, this metric is a measure of self-control. Just because you have available credit, you do not have to use it. Creditors want to know that you are not maxing out your cards and taking on “too much” debt. A simple rule of thumb is to keep your ratio of credit used to credit available below 20%.

Third, your Credit History is determined by looking at all of your credit accounts. Creditors want to see that you have had other credit accounts for a long period of time and that the accounts are in good standing. Meaning, you need to have credit accounts that have been open for many years. The credit bureaus prefer to see accounts that have been open for literally decades. For example, I have a card that has been open and in good standing for over seven years, which is considered “too short” by the credit bureaus. Therefore, leave your credit accounts open even if you are not using them. This also helps to decrease your credit used to credit available ratio. One caveat, don’t have too many credit accounts open. If you have quite a few cards and need to close some, just close recently opened cards.

Another important part of your credit history is showing that you have used your credit. Sometime ago, I had Trilegiant perform an analysis on my credit (more info on Trilegient in another post). One of the critiques that I received was not using my oldest credit account. So even though the account had been open for years and had a great payment history, the lack of use was not helping my credit score. Meaning, use your credit accounts from time to time even if it is just a small amount.

Fourth, your Application History is a record of how often and how many times you have checked your credit (also known as “inquiries”). The logic is that if you are frequently checking your credit, then you intend to use it and potentially overextend yourself. There is no perfect number of times of how often you should check your credit in a given time period. However,  inquiries are removed from your credit report after 24 months (though only impact your credit score for 12 months). A good rule of thumb is no more than 3-5 inquiries in a 12 month time frame.

The last factor is your Credit Mix. Credit is grouped into different types: installment and revolving. Installment credit is credit that has a fixed number of payments, so basically a loan. Your mortgage, auto loan, personal loan, or student loans are all types of installment credit. The other type, revolving, does not have a fixed number of payments. Most know revolving credit as credit cards or department store cards. Having a mix of credit shows that you know how to handle different types of credit. Also, try not to have too many credit accounts of one type (e.g. Kohl’s, Macy’s, Sears), which can decrease your credit score. If you are able to diversify your credit mix, then you are more likely to receive additional credit later.

Managing your credit is essential since so many things depend on it

You should evaluate the current status of your credit score and credit report for growth opportunities. Then, create a written action plan to improve your credit.

For additional information on improving your credit score, I’ve posted a brief YouTube video title “How to Improve Your FICO Score.”

(This post was featured in the Carnival of Twenty Something Finances)