People in the midst of a divorce are most likely thinking about the future well-being of their children, cash flow, living arrangements, or even employment options. The last thing on their minds is probably their credit.
I am here to tell you that your credit is also important and should not be overlooked. Your credit score determines whether you qualify to borrow money, as well as the terms of the credit (interest rate). It is also a factor considered by insurance companies and prospective employers.
This score can have a significant financial impact on your future and should be monitored very closely as you begin the divorce process. It can be easily managed when you plan in advance, but very frustrating when you need to “fix something” right away.
In general, joint liabilities remain just that – JOINT. A signed divorce decree does not relieve a spouse of joint financial obligations, therefore, any late payments will negatively affect both parties. A divorce decree may specify who is responsible to continue payment on certain accounts that were established during the marriage; however, it doesn’t terminate a contract with the lenders.
So what can you do to protect and prepare yourself as you begin to disentangle your finances from your spouse’s?
- Obtain a credit report– After several years of marriage, it is easy to forget about an account that was opened some time ago and hasn’t been used recently. The best place to start is your credit report. Be sure to obtain one from each of the three credit bureaus to review what accounts are open in both names. You are entitled to a free annual credit report from each of the three credit bureaus so you can request a report from one agency every 4 months to monitor your credit fairly easily. Visit: annualcreditreport.com to get started. If it is not clear whether a spouse has athe uthorization to use a specific card, inquire with the creditor directly. This would also be a good time to correct any inaccuracies you find.
- Verify your status– Are you/your spouse a joint applicant or an authorized user on each other’s card? An authorized user can be removed from an account, but a joint applicant cannot since both applicants’ income was considered when the credit was granted. Remove your spouse from any accounts where they are listed as an authorized user.
- Close all joint credit accounts – Any joint credit cards or lines of credit with no outstanding balance should be closed immediately. This includes overdraft protection on a checking account or a home equity line of credit. Accounts with outstanding balances can be frozen to avoid any increase in the balance.
- Address the mortgage/auto loan– If the marital home (accompanied by a mortgage) or an automobile (with a related loan) is to be part of the settlement, consider available refinancing options on both before agreeing to anything. If the asset is transferred to one spouse as part of the settlement, it could still have the other spouse’s name on the debt after the divorce is final. This means their credit will be at risk of late payments. Removing the other spouse from the joint debt can only be done by refinancing or paying the balance in full.
- Establish your own credit – If you don’t have individual credit (or have poor credit), get started now. Apply for a new credit card and begin using it responsibly. If you have problems obtaining credit, start with a secured credit card and expand from there gradually over time. Building credit takes time – there is no quick fix. Using it regularly (i.e., for monthly utility bills), responsibly (don’t use all available credit) and paying it timely will build your credit over time. Hopefully, the divorce proceeding won’t be terribly long, but why not start today and establish solid credit for yourself in the interim?
When dividing the marital liabilities the associated credit risk always needs to be considered. Without taking these protective measures, your credit could remain vulnerable (post-divorce) to late payments, lack of liquidity/cash flow, or even an ex-spouse’s spending spree. Protect yourself with these steps so your credit is there when you need it.