How divorce can hurt your credit and 8 tips to help protect it
A marital separation isn’t only about splitting up your household.
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Going through a divorce is a difficult enough time emotionally that you may not immediately think about how it will affect your finances. But the hard truth is, you’ll want to protect your credit as you separate from a spouse and go about building a new life on your own. Joint finances, such as joint credit card accounts, joint car loans, joint home loans, must be addressed or there could be unpleasant surprises down the road. Follow these eight steps to protect—and even improve—your credit during and after a divorce.
1. Review your credit report
Not sure what credit accounts are in your name or a joint account with your spouse? Get a copy of your credit report and check. You can get a free copy of your credit report from several sources including annualcreditreport.com. A joint credit account will list the account as “joint” and give the name of the joint account holder, says Rod Griffin, senior director of consumer education at Experian, one of the three main national credit reporting agencies.
Make note of balances on credit accounts in your name and in the names of you and your spouse. Are there any joint accounts that you’ve forgotten about, such as a store card? Your credit report gives you a view of your total credit picture.
“The best way to protect your credit is to be aware of how things are being reported,” says Ginita Wall, a certified financial planner in San Diego, California and co-author of The ABCs of Divorce for Women.
2. Uncouple your joint accounts
Your lives are no longer joined together and your financial connections need to be separated as well. In general, you have four options: 1. You can ask the lender to remove your name from a joint account, 2. ask the lender to remove the spouse’s name from the joint account, or 3. pay off the balance in full and close the account, or 4. have the lender transfer the account balance to two new credit accounts, Wall says.
But each lender for each joint credit agreement must be approached separately. “You should be able to work directly with the lender to remove yourself from the account,” Griffin says. “However, the lender will determine its policies and processes, some may require a request in writing or other documentation.” No doubt this will also require the signature of the other party being separated from the account, adds Wall.
Follow this same procedure for each joint account that you share with a spouse. “Be sure you have severed all credit ties between you and your spouse,” Wall says. “You have no credit cards in common. You have no loans in common.”
A big mistake divorcing couples make is believing that a divorce decree from a judge separates them financially. “A divorce decree is an agreement between divorcing couples and the court—a handshake,” Griffin says. “A divorce decree is separate from a credit contract. Contractually, you are still responsible for that debt.”
3. Prepare for credit hiccups
Closing joint accounts you’ve had for years can cause your credit score to dip down, as the length of time accounts have been open is a factor in calculating your score. But it shouldn’t stay that way long. Assuming you’re careful with your own credit and don’t miss any payments, your score should rebound in a few months, says Griffin.
On the other hand, a divorcing spouse who goes on a spending spree with a joint credit card or refuses to help pay off the existing balance for a joint account will cause more damage to your credit. With a joint account, you're both on the hook for payments even if the other spouse is doing the spending, until the divorce is final.
At the minimum, make sure joint accounts are current with their minimum monthly payments and pay what you can to lower outstanding balances. (And raise the issue of this debt with your lawyer as you seek a settlement.)
Unfortunately, divorcing someone who’s financially irresponsible—or spends spitefully—means your credit may have a longer road to recovery. “It may take longer to fix if you don’t have the money [to pay off the debts yourself],” Griffin says.
4. Add a disclaimer to your credit report
Each of the major credit reporting agencies allows you to include a short, general statement to your credit report or make a statement about a specific credit account as a means to explain how you got into that debt situation. Lenders, landlords, and other businesses who request to review your credit report will be able to see these statements, which will hopefully put your situation in perspective and prevent you from being denied a new loan or credit line, a rental apartment, or a utility company service.
“A general statement may explain that you’ve faced a financial challenge because of divorce,” Griffin says. “An account-specific statement could say that the divorce decree specifies your ex-spouse is responsible for the debt.”
5. Brace yourself for tighter finances
Divorce is tough on finances and disrupts plans, and it may take some time to recover. “It throws a monkey wrench into finances,” Wall says. “At best, you’ll only have half of what you have before.”
Paying credit accounts on time can be difficult but are necessary for building and keeping good credit. “Take out credit cards in your own name, be responsible about making payments, and make payments on time,” says Wall.
If one spouse has been completely financially dependent on the other, they may have little or no credit in their own name. In this case, it may be wise to open new solo credit cards before the divorce is final. “[If you] apply for a credit card in [your] own name when still married, [you’ll] have the family income reported,” Wall says. This means you’ll be set up better for approval and with potentially a higher credit limit than if you wait until after the legal divorce degree is signed.
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6. Check for community property laws in your state
Nine states have “community property laws,” which dictate that the assets and debts that a couple has is split 50-50, no matter what. So when it comes to credit, you’ll be 50% responsible for a spouse’s individual credit accounts, not just any joint accounts. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, Texas, Washington, New Mexico and Wisconsin. Additionally, in Alaska, couples may choose to opt-in to share debts and assets equally.
What’s the best credit advice for divorcing couples in community property states? It’s the same advice for anyone who has credit, regardless of marital status or residency: Don’t charge what you can’t pay off and pay down your current (or divorce-inherited) debts as quickly as possible. And adding one of those 100-word statements to your credit report may be especially beneficial here.
7. Be as civil as possible in matters of finances
The emotional toll may be steep, but you must try to keep the financial one at a minimum. Therefore, do your best to maintain a civil relationship—at least surrounding money matters—with your former spouse as you go through the divorce process and separate finances. “[It’s] incredibly important to have cordial conversations about finances going through divorce,” says Griffin.
But what if your soon-to-be-former spouse won’t talk to you or refuses to cooperate in even these financial discussions? “If the person specified in the divorce decree refuses to fulfill their obligation to the court and pay the specified debt, you should talk to your lawyer, who can report the breach of agreement to the court,” Griffin says. “The court may then be able to take action to enforce the divorce decree.”
8. Be patient and persevere
Remind yourself over and over: Take it one month at a time. This may already be your mantra as you face your impending future but it’s especially universal when it comes to post-divorce finances. “Your credit history you can control and you can make it better over time,” Griffin says.
And once you start to see that score rebound, you’ll be on your way to financial independence as you rebuild your life. “Stronger credit scores will be beneficial if you need to refinance the new debt at lower rates or qualify for a new apartment rental, utility service, and other aspects of setting up an independent life,” says Griffin.
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