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Joint Debt - Loan and Credit Card Bills
Julie, a 20 year old full time college student, married Bert, a 24 year old medical clerk. On the day she signed their marriage license, her credit report score began to worsen.
Julie knew Bert had been previously married, and though that marriage had lasted only two years, it was long enough to spread a bad credit virus onto her and Bert's joint credit report score.
Bert's ex-spouse, Camille, already had delinquent credit before she married Bert. And, she had continued being delinquent during her marriage to Bert and after the divorce. Unbeknownst to Bert, Camille's bad credit had passed onto him when he married her, and then passed on to his new bride, Julie.
Why? Because when couples marry, assets; as well as debts, become joint. Unfortunately, divorce does not nullify financial obligations, even if a judge specifies in a divorce decree which spouse is responsible for re-paying which bills.
But this is just the beginning of Julie and Bert's bad credit horror.
Julie had racked-up several thousand dollars in student loans. After she married Bert, she dropped out of college and that action initiated the loan repayment period. Like Bert, she also has a full time job, but it's hard to pay the debt because of other bills.
In the divorce decree with Camille, Bert retained possession of the car which still had loan payments due. Camille received all the furniture in the divorce settlement. Bert and his new bride, Julie, had to purchase new furnishings for their apartment. Additionally, they had spent a lot of money on their wedding and honeymoon. Together they had a lot of debts to repay, and some bills were being paid late. Their credit score continued to dive.
They got an idea. They would balance transfer Julie's credit card and Bert's credit card to a new credit card that offered 0 interest balance transfers for the first six months. Unfortunately, since their credit score was bad due to excessive debt-to-income ratio and late payments, they were rejected by the card issuer.
Bert refinanced his car to lower the monthly payment. Since his credit was bad, he had to extend the term (repayment duration) of the loan an additional two years and at a higher interest rate than the original loan, but he was able to get $1,000 in equity. He and Julie used the $1,000 to catch up on their bill payments.
Six months later, now that they had caught up on their payments which also lowered their overall debt-to-income, they reapplied for the 0 intro balance transfer credit card and were accepted. They transferred their credit cards to the 0 intro card.
Three months later, they received a letter from the new card issuer that stated their 0 interest period had been terminated. Why? Because Julie and Bert had mailed an auto loan payment a few days late. The late payment was reported by the auto lender to a credit reporting agency which lowered their credit score. The new card issuer's terms required Bert and Julie to maintain (or improve) their credit score by making all payments (not just payments on the card) on time. In addition to terminating the 0 interest period, the issuer also increased their APR rate.
Other than ordering credit reports before marriage, what could Bert and Julie have done differently to avoid the bad credit virus?
Before divorcing Camille, Bert should have made sure all debts assigned to her would be repaid, and repaid on time. Obviously, the only sure way to have done this would have been for Bert to make the payments himself. He could have refinanced his auto after divorcing Camille, used the equity to payoff her debts, and then have her repay him. He should have also ensured that all joint accounts with Camille had been closed to prevent additional charges.
Julie should have continued her full time student status; not only to improve her career opportunities, but also to delay the student loan repayment requirement.
And there are obvious things Bert and Julie could have done, such as buying used furniture whenever they had available cash instead of charging purchases for new furniture on their credit cards. Additionally, they could have spent less on their wedding and honeymoon.
Marriage and joint debts can indeed spread bad credit like a virus. Don't rely upon a divorce decree to separate you from bad credit.
Article by Toni Phelps of Credit Federal where you can find more credit information and resources.
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