Managing Your Credit During Divorce
After divorce, it’s often the case that one or both parties will need to purchase a home, cars, or home essentials that come with maintaining two households instead of one. However, the divorce process can often be so traumatic or rancorous that your credit can be damaged by neglect or ill-will of your ex-spouse. For these reasons, divorce can be very harmful to your credit, just at the time you might need it most. Here are the most important considerations:
Protect yourself as you head into a divorce
Because divorce is a financially trying and emotional time, it’s easy for both parties to lose control of spending or spend as an escape which can run up debts. Protect yourself by agreeing with your spouse to open up separate credit cards under your own names and to close joint credit cards.
Remove your name from current debts
Although you may agree to divide up responsibility for debts as part of the divorce process, you will both be individually responsible for loans that you’ve co-signed. This means that creditors can demand payments from either party, regardless of whether or not it was assigned to you as part of the divorce process, and that the payment history will be reported on the credit report of both parties.
Having your name on a debt that is not your responsibility can clearly create financial and credit problems should your former spouse quit making payments due to financial difficulty, neglect, or revenge. You can protect yourself by ensuring that you restructure debts to remove your name from any debts that you don’t assume in the divorce settlement. In all likelihood, your current creditor will not remove one of the parties from the loan, so you may need to close accounts and transfer credit card balances or re-finance a mortgage under just one name. It goes without saying that you shouldn’t cosign on any new loan for your ex-spouse.
Preserve your credit history
After divorce, it’s often the case that one spouse (often the wife) will have their score dramatically impacted because they can lose part of their credit history, which accounts for a large portion of your credit score. If you have limited credit history from before you were married, you should manage the division of accounts so that you maintain some portion of this history on your credit file. If you remove your name from a joint credit card that you opened a long time ago, you may remove an important part of your credit history. In this case, it can be better to negotiate to pay off the balance if there is one and remove your spouse’s name from the account and keep it on your file or simply pay off the account and close it so the history will show on both files. If most of the accounts were only in your ex-spouse’s name, you may actually wish to get your name added to the account and then pay off and close the account so that you can benefit from the history of that account on your own credit file.
Involve your attorney
Your divorce attorney should be able to offer advice on how to limit the impact on your credit and how to protect yourself during your divorce. Make sure that you express early in the process you want to protect and plan for the impacts on your credit.