Helping Clients Manage Life Transitions—With Credit Intact

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Divorce, widowhood and other life events can be as much a financial hardship as an emotional one. Here are some strategies to help your clients minimize potentially negative impacts to a credit score after experiencing a life transition.

A question that often comes up when I speak with clients who are going through these situations is, “How can getting divorced or becoming widowed affect my credit score?” Not surprisingly, these life transitions can have a significant impact on a client’s financial well-being.

Transitioning from a two-person household to one requires making major lifestyle adjustments, and credit scores are often overlooked in the midst of this turmoil. To help a client avoid making hasty decisions that could affect their financial security, here are four strategies to help minimize the impact to their credit scores.

1.) Get organized.

Before you attempt to address the credit question, it is imperative to have a clear picture of a client’s current overall financial situation. Start by gathering documents related to financial obligations as well as insurance, taxes, retirement accounts, banking, investments and legal matters. Ideally, a client will have taken this step before the life transition event has occurred as part of their ongoing financial planning, but be prepared to perform at least some level of document gathering and organization.

2.) Make sure your client understands the importance of credit scores and credit reports.

Credit scores may take a hit during a life transition, typically due to a drop in income or an increase in expenses that are no longer being split with a spouse.

In some situations, creditworthiness may have been built under the name of only one spouse; in that case, your client may need to start building a credit history in order to meet the minimum standards required to establish a credit score. (The FICO scoring formula requires at least one recently-reported account opened more than six months ago.)

Additionally, lower credit scores may result in denied loan applications or having to pay high interest rates and extra fees—all of which can derail a client’s financial goals. Obtaining a current credit report is the best way to properly assess the situation. Remind clients that they can obtain one free credit report from each of the three major credit reporting bureaus (Experian, TransUnion and Equifax) every 12 months.

3.) Pay bills on time.

A third of one’s credit score is based on whether an individual pays bills on time, and all it takes is one missed payment to make a credit score drop. Work with your client to help ensure all their bills continue to be paid in a timely fashion. If an ex-spouse is responsible for a debt, it is beneficial to include an indemnity clause in the settlement, in the event of default.

4.) Make rational decisions about the family home.

Often, there will be an emotional attachment to the family home following a life transition. Your client may want to remain in it, particularly if there are children involved. While the sentimental aspect cannot be avoided, your role is to take the lead on having a rational, in-depth discussion on the practical considerations of maintaining ownership of a house or property. A mortgage is typically a client’s largest expense, and the decisions made on this front could affect his or her ability to make on-time payments.

Ultimately, creating a comprehensive plan for your client that includes a detailed discussion about credit will provide the necessary backdrop to build a solid plan for their financial future.

Let Us Help You with the Tough Conversations

Help clients turn a trying life event into an opportunity for a fresh start and financial empowerment with tips from the Knowledge Labs™ Women and Divorce and Women and Widowhood Adviser Meeting Guides.

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Marquette Payton, CDFA®, is an associate retirement director for the Defined Contribution and Wealth Advisor Services Team at Janus Henderson Investors. In this role, she works with financial advisers, Janus Henderson colleagues and clients to find solutions to today’s increasingly difficult retirement issues, whether within retirement plans or with individuals preparing for retirement. Payton also delivers women-specific content nationally to client audiences.  Prior to joining Janus in 2011, she worked as a manager at American Century Investments, where she led and coached a team that focused on consultative sales with retail clients. Ms. Payton received a bachelor of science degree in microbiology with a minor in chemistry from New Mexico State University, where she was recognized as a Crimson Scholar. She holds FINRA Series 7, 63 and 26 securities licenses and has 20 years of financial industry experience.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a professional advisor. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information. C-0519-23971 09-30-20

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