Your marital status doesn't play any role in calculating your credit score – so why could a divorce harm your credit score? Joint accounts are the reason.
Most couples have joint debt like mortgages, credit cards, and loans. A divorce decree may assign responsibility for a joint debt, but the decree doesn't affect the lender's contract. If the responsible party doesn't pay, the late payment registers on the credit reports of both former spouses.
Even if your divorce is amicable, confusion about joint debts can harm your credit score – and a vengeful soon-to-be-ex can really create financial chaos.
How do you avoid this chaos? Take preventative action to separate your joint accounts before the divorce is finalized.
Apply for your own card before closing your joint accounts. If you close all your accounts first, the temporary credit score drop may hurt your qualifications for a new credit card.
Find a card with a limit that you can easily pay off at the end of each month. Make small purchases on that card and pay them off in full each month to build your own credit profile. If you have trouble qualifying for a suitable card, consider finding a trusted co-signer or look into a secured card that requires an initial deposit. For starters, check out our list of secured credit card offers.
Next, work your way through the joint debts. It may not be practical to close all joint accounts and pay them off straightaway. If you can't pay off an account balance, place the account on inactive status (allowing no more charges) by notifying the creditor in writing, and ask for a current account balance. Work out a payment arrangement with your ex for the remainder and close the account once it's fully paid.
If one spouse is listed as an authorized user on the other spouse's individual card, notify the card issuer in writing to have the authorized user removed.
For long-standing joint accounts, it may make sense to simply have one name removed and have the other assume full responsibility for the account. Length of credit history is one of the five primary credit score factors and closing an old account in good standing can cause scores to dip. You may have to pay off any balance before a name can be removed.
Check your credit report regularly during and after the divorce. Your report lists all your debts and accounts, showing if your spouse (or anybody else) opened accounts without your knowledge.
Consider applying a credit freeze to your account to prevent an angry ex from trying to open any "revenge accounts" in your name. With a credit freeze, no lender can access your credit file to assess the risk of lending you money. You'll have to "thaw" your account to open a new line of credit and re-freeze it later – but the protection may be worth the hassle.
Mortgages may be difficult to untangle if one spouse will be keeping the home. It's best to make a clean break – removal of one spouse's name from the mortgage and assumption of all liabilities and payments by the other.
Refinancing, or even selling the home, may be required. A single owner's income may not cover the existing monthly payments, taxes, and running expenses. In addition, the overall larger debt relative to one income may make it difficult to get new credit. MoneyTips is happy to help you get free refinance quotes from top lenders.
Divorce can certainly hurt, but it doesn't have to be financially painful. Take necessary precautions before the divorce is final, and you can move on with your life afterward with a fresh perspective – and decent credit.
You can check your credit score and read your credit report for free within minutes by joining MoneyTips and using our Credit Manager tool.