“I’m going through a divorce and trying to save so that I have a cushion when I’m on my own,” the reader wrote.
Her husband was laid off two years ago. He became depressed, and that led to a lack of motivation to find employment.
“He refused to find new work and got mad when I said it was a dealbreaker,” the wife wrote. “He withdrew money and left.”
The financial aftermath isn’t pretty.
“Like my credit score, my bank account is ugly,” the reader said.
She wants to refinance the mortgage in her name only. There’s a little bit of equity, but she expects to be legally obligated to split it with her ex. But here’s the problem with refinancing. She and her husband got behind in their mortgage payments. Although she has caught up on the past-due payments, the delinquency did a lot of damage. Her credit score is below 500. The FICO credit score scale ranges from a low of 300 to a high of 850. Credit scores of 500 or below land you in the riskiest credit tier.
And there’s the other debt — student loans and credit cards. “I have $5,500 in credit card debt,” she said. “A medical emergency is what got us really behind and cut into our savings. Had my husband been working, we would’ve managed, because technically I can handle all the bills on my salary alone, if I stop with the restaurant lunches — please stop making that face.”
So what now? Here are responses to this soon-to-be divorcée’s questions on how to get back on track financially.
Q: Should I focus on rebuilding the emergency fund or put as much money as possible toward the accounts in collection to get rid of them? I’ve deferred my student loans because it was too much of an added burden, but once I pay off the other debt, I’ll have more to throw at the loans.
A: When it comes to saving versus paying off debt, it’s not an either/or situation. You have to do both. If you already have outstanding credit card debt, and you don’t have any savings if a financial emergency comes up, you’ll just make a bad situation worse.
I suggest saving at least $1,500 in an emergency fund. Once you hit that target, stop and put any extra money toward paying down the credit card debt. While you are building up your savings, just make the minimum payment on the cards.
And definitely work to get the student loans out of deferment, because that, too, is adding to your debt burden.
Q: I have no existing credit card accounts in good standing, so should I get a secured card to re-establish good credit, or is that a waste of time?
A: The way a secured card works is you deposit a certain amount of money into a bank or credit union depositaccount, typically $250 to $500. You can’t touch the money, because it’s security for your credit limit of the same amount. So if you deposit $250, that’s the available line of credit on the card. Over time, as you charge and pay the account on time, you build a good credit history.
But in this situation, you don’t need any more credit. In fact, applying for an additional card could drop your credit score.
The No. 1 way to boost your credit score is to pay your bills on time. So start making at least the minimum payments on the existing cards by the due date.
Q: What’s the likelihood my mortgage company will work with me to refinance?
A: You may have a better chance to refinance with your current lender. If you have an FHA-insured loan, look into a “streamline refinance.” Your recent history of late or no payments on the mortgage and credit cards will make refinancing challenging. However, with a good income and enough on-time payments, you may eventually be able to refinance with favorable terms.
Most important, don’t stress yourself trying to rush your financial recovery. Even after an ugly divorce, with discipline and patience — and no more restaurant lunches for a while — you can get a fresh start with your finances.
Readers may write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or email@example.com. To read previous Color of Money columns, go to wapo.st/michelle-singletary.