NEVER EVER PAY COLLECTIONS!
How to Avoid Ruining Someone Else's Credit
Typically, you are responsible only for your own debts. However, in some situations, you may affect another person’s credit. For example, someone might have cosigned for your loan, or they might have added you as an authorized user to their credit card. To minimize any damage, you need to be responsible. Pay all bills on time and don’t run up any unnecessary charges. If you’re divorcing in a community property state, then you should identify joint debts and pay them off so that you don’t harm your ex-spouse’s credit.
Paying Your Cosigned Debts
Understand how cosigning works.If you don’t have a credit history yet—or if you have a bad credit history—lenders won’t give you money unless you have someone agree to be responsible for the loan. Often, this person is a parent or partner. If you default on the loan, this person must make payments, otherwise they can be sued.
- For example, you might be 18 and buying a car for college. Because you have no credit history, a bank requires that your parents cosign the loan. They are now personally responsible on the loan and must pay it back if you don’t.
- Alternately, you might have gotten into financial trouble, causing banks to deny your loan application. You have your spouse cosign for a personal loan. If you default, your spouse’s wages may be garnished to pay for the loan.
Remember when your bills are due.You can’t pay what you can’t remember. If you struggle to remember when a bill is due, sign up for alerts. Many credit card companies offer them. As your payment date approaches, you’ll receive either an email or a text message reminding you that payment is due.
- There are many apps you can download as well, including Manilla and Bills Reminder from Handy App.
Pay the full amount on time.If you’re late, then your account could go into default, which will be reported on your cosigner’s credit history. You also might get hit with penalties, late fees, and a higher interest rate, all of which increase your indebtedness.
- If necessary, create a budget to free up as much money as possible to contribute to your debts.
- Be responsible. Your cosigner did you a favor by cosigning for the loan.
Talk to your cosigner before you fall behind.Life is unpredictable, and you might suddenly run into financial problems. Maybe you lost your job or had unexpected medical expenses. Regardless of the reason, you should talk to your cosigner immediately because defaulting has negative consequences for them.
- For example, if your car is repossessed, then the repossession and delinquency will show up on your cosigner’s credit report.
- Maybe your cosigner can help you. For example, you might need to leave your apartment and contribute your rent payments to your loans. Your parents might let you move back home.
Contact your creditor immediately.You might have some options if you fall behind. For example, you might be able to ask that student loan payments enter forbearance or deferment. Other creditors, such as credit card companies, might be willing to defer payments for a few months until you get back on your feet.
- The key is to avoid default, which typically is reported to the national credit bureaus. A negative entry will show up on your cosigner’s credit report, which will hurt their credit score.
- Gather documentation to show your lender that explains why you are having financial problems. For example, if you’ve stopped working due to illness, find medical records and medical bills.
Remove a cosigner, if possible.Sometimes, a lender will let you remove a cosigner after you’ve proven that you can make timely payments over a period of time.Contact your lender and ask if you can remove them.
- The cosigner can’t remove themselves, so this is something you need to take the lead on.
- You can call your lender or send them a letter. The Consumer Financial Protection Bureau has sample letters you can use to request a release: .
Refinance the loan.Another way to release a cosigner is to refinance any debt and not have them cosign for the new debt. If your credit history has improved, you might be able to secure a new loan or credit card.
- For example, you can transfer a joint credit card debt to a card in only your name. Use a balance transfer. Often, you can get a credit card with an initial 0% APR for up to a year or more.
- You might also be able to refinance a home mortgage or a car loan in only your name.
Sell a financed asset.If you can’t make car payments any more, maybe you need to sell the car. Use the proceeds to pay off the amount of the loan.This is a good way to protect your cosigner’s credit.
- Many assets depreciate and are worth less than the loan. Accordingly, you might still owe money on the loan. However, the amount should be much smaller.
Avoid Chapter 7 bankruptcy.Chapter 7 might provide you with protection, but it doesn’t offer much protection to a cosigner on a debt. After you file Chapter 7, your creditors cannot pursue you because an automatic stay stops all collection efforts. However, the stay doesn’t extend to your cosigner. Instead, the debtor can pursue them for the debt.
- Instead of a Chapter 7, you can file a Chapter 13. Chapter 13 offers a codebtor stay for non-business debts. This will protect your cosigner from any collection efforts.
- In a Chapter 13 bankruptcy, you can also set up a payment plan (3-5 years) to pay off your debts. For example, you can pay off your car loan and not lose your car.
Using Credit Wisely as an Authorized User
Ask what you can use the credit card for.Your parents might have added you to their credit card to help you learn financial management or in case of emergencies. Ask ahead of time what you can use the credit card for—and don’t buy anything that hasn’t been approved.
- Although you get your own card, all charges go to the primary cardholder’s account. They can see what you buy. And they are responsible for paying the bill on time.
Avoid using the credit card as a cash substitute.Fewer people carry cash on them. However, you shouldn’t use the credit card as a substitute for cash. You will very easily rack up charges, all the while thinking, “I’ll pay Mom back for this.” Before you know it, you’ve charged hundreds of dollars that you can’t repay.
- Instead, use cash to pay for things like food, movies, and magazines.
Chip in if you run up debts.It’s unfair to go on a spending spree and then leave the primary cardholder to pay your debts. They may end up defaulting on the debt, which will hammer their credit score. Accordingly, you should do what you can to pay off your debt:
- Get a part-time job. You have time in the evenings and on weekends to earn money to pay back the primary cardholder. Find a part-time job or pursue freelance work.
- Sell possessions. Hold a garage sale or put items on eBay to sell. Then contribute the proceeds to the debt. The faster the debt is paid off, the better the cardholder’s credit.
Remove yourself from the card, if necessary.Call the credit card issuer and ask to be removed. Some may allow you to submit a request online. Provide the account information and answer a security question.
- You should tell the primary cardholder that you want to remove yourself. You may need their help.
- You should check your credit report to see that you’ve been removed as an authorized user. If not, follow up with the credit card issuer.
Divorcing in a Community Property State
Check if you live in a community property state.In most states, a debt isn’t yours unless it is in your name. For example, if Jane and Joe are married, Jane can run up the bills on a credit card in her name and Joe isn’t responsible. However, nine states are “community property” states, and debts incurred during marriage are generally both spouse’s responsibility on divorce. The following are community property states:
- Alaska (optional)
- New Mexico
Identify debts you incurred during marriage.Generally, any debt incurred before marriage is yours alone. However, if you took out debt after your marriage and before divorce or separation, then it will be a community property debt.
- States differ depending on when the marriage ends. In Wisconsin, for example, the marriage ends with the final divorce decree. In Washington, however, the marriage ends when you are living separately with no intention of reconciliation.
- If you are splitting up, consult with a divorce attorney before taking out a loan. Depending on the timing, you might be creating a debt for your spouse as well.
Pay off joint debts first.The easiest way to protect your spouse’s credit is to pay off all joint debts before tackling any individual debt that you have. If necessary, freeze your credit cards so that you don’t incur any more debt. Contribute as much excess cash as you can to pay down debts quickly.
Assume responsibility for marital debts upon divorce.Depending on your state, debts might be divided 50/50 (as in California), or the judge might have discretion to provide an unequal distribution (as in Texas).However, credit card companies are not bound by your divorce decree, and they might still go after your ex-spouse.
- Regardless of what the judge decides, you can voluntarily assume responsibility for debts by transferring them to a credit card in your name after you divorce. Use a balance transfer and relieve your ex-spouse of responsibility.
- Don’t transfer too early. Consult with a lawyer about when community property ends in your state.
Include an indemnity clause in a divorce settlement agreement.You can provide added protection to an ex-spouse in your divorce settlement agreement. By providing indemnity, you agree to reimburse your ex-spouse for any expenses if a creditor comes after them for a debt.
- Unless you transfer the debts into your name (using a balance transfer or debt consolidation), your ex-spouse will still take a credit hit if you default on the debts. The indemnification clause can’t protect against that.
QuestionIs it possible to take my parent's credit card without the parent knowing?Top AnswererOf course. If your parent, for example, checks that the credit card is there every Monday, then you take it on Tuesday, and put it back on Sunday. Unless, of course, you actually use it to make a purchase. Then it will come up on their statement and there'll be hell to pay.Thanks!
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