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Separation or divorce can hurt credit rating, experts say


By Rita Trichur

TORONTO (CP) - In the midst of separation or divorce, a broken heart can often lead to bruised credit when spouses deliberately rack up hefty bills on joint-credit accounts to stick it to one another.

Mortgage experts warn that when those bills go unpaid both will feel the hit, a hurdle that could prevent each from later accessing mortgage options in their newly single lives.

"I've seen a lot of situations where they are not on such good terms and neither one of them wants to pay the credit card bills monthly," said Jim Rawson, a regional sales manager with Invis Financial, an independent mortgage broker purchased this week by HSBC Financial Corp. Ltd.

"And what happens is that they both destroy their credit rating."

With more than 70,000 divorces in Canada every year, Rawson says it is a sad, yet common ending to a soured romance.

Most people caught in the predicament failed to consider that tarnished credit prevents both spouses from getting on with their lives, and that can easily scuttle plans for the division of the matrimonial property - whether that be plans by one to buy out the other's equity or the purchase of individual homes after splitting the proceeds of a sale.

Rawson said those who feel they might fall victim to a spouse's spite, should immediately contact their bank to protect themselves from incurring future debt on a joint-credit card or line of credit.

"Make sure you have the cards cancelled or get in touch with the financial institution," Rawson said. "You gotta understand that when you have a co-borrower on a card or a loan, you are responsible for that debt."

Those already faced with maxed-out credit should pay off that debt as soon as possible. Sitting down with a financial expert and consolidating bills is a good start. But it is also important to stick to a budget and creatively manage extra expenses that accompany a separation or divorce. Those could include legal fees, additional living expenses such as hotel or rental accommodations and secondary insurance.

"All of a sudden, two people are getting cable, two people have a phone. All of the things that you never think about that you share - all of a sudden there are two of them," Rawson said.

"When people are going through a life-changing experience like a divorce or separation, they tend not to worry about the little things. But it is those little things that can turn around and bite you later on."

Whether buying out a spouse's equity or searching for a new home, after any property settlement those who are separated or divorced must qualify for a new or refinanced mortgage with their own income. To begin assessing an application, most lenders require a separation agreement to see how support payments will affect an applicant's eligibility.

Applicants can usually hope to qualify for about 3 1/2 times their annual income, but that figure is also affected by other investments, credit history and the amount of one's downpayment.

Men, who usually pay support, may qualify for less, while women receiving support can use those payments to boost their income. Getting a pre-approved mortgage is a good way to gauge one's budget.

"The main thing during a separation or divorce is to really know what you can afford to purchase," Rawson said. "Sometimes you do have to reduce the standard of living because all of a sudden, you are looking at one income."

There are also solutions for homemakers who discover they do not qualify for a mortgage from a mainstream bank because they have no credit history.

An independent mortgage broker, who has access to a diverse range of mortgage options, can provide advice on how to build or repair a credit rating through the responsible use of credit cards, GIC deposits and accessing RRSP loans.

Katherine, who was married for 22 years before her husband left her for a friend, said being organized ahead of time saved her a lot of grief.

"The good thing I had going for me is that I have always kept my name on everything, kept his business books and my own credit cards," she said in an online chat room.

"First check to see if your name is on anything... see if your name is on the lease, if so make a copy of it and use it as a form of credit history. Is your name on a car loan, the chequing account - anything?"

News from © The Canadian Press

Source:  Sympatico / MSN Finance Articles


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