(This is Part Two of a Two Part Series - Click here for Part One: How To Improve Your Credit Score After Divorce)
Divorce is messy. Even the most amicable split touches every corner of a person's life: loved ones, homes, routines, jobs, finances and, most of all, emotions. And in the midst of all that it can be understandably difficult to remember that your credit score, one of your most important financial tools, is vulnerable to collapse. If you have been the family's primary wage earner, it's all too easy to think your credit score and history are not at risk. But they are. So just as it's important to carefully navigate each step of a divorce with care and planning, there are important steps to take to help ensure you come out the other side on solid financial footing.
Plan Early and Get Help
If you know your marriage is over - even if you haven't actually filed for divorce—it's time to do some financial planning. Lisa C. Decker, Certified Divorce Financial Analyst and owner of DivorceMoneyMatters.com says that it may even be in your best interest to begin planning before you've told your spouse you want a divorce. "It's not about plotting. It's about planning. It's about being S.M.A.R.T. from the start," she says. Start early. Manage your emotions. Assess your options. Reach out for help. Take the team."
"Your divorce attorney should not be used as your therapist and your financial planner should not be counted on for legal advice. Having someone review your credit matters as early on as possible is vitally important. Once you've created a problem, sometimes it's next to impossible, if not impossible, to undo that damage."
Don't Rush the Process
It's understandable to just want to get the divorce over with as fast as possible. But speed may not be your friend when the aim is a solid post-divorce credit score and financial life. Insisting on a quick resolution at any cost is one of the most common mistakes Decker sees.
This leads people to make emotional financial decisions that may help over the short-term but are not in their long-term interest. Remember, it usually takes years for your finances to become intertwined with that of a spouse. It also takes time, thought, and wisdom to sufficiently untangle the unified financial life you built together.
Divorcing Joint Accounts
A good way to start is by separating any jointly held accounts. It's not always easy, yet Decker says it's essential. "You are not completely divorced until your joint debts are," she says. Here are some common accounts that need to be split:
1. Credit card with authorized user
Here's a simple but vital tip: If your name is on the credit card as the primary account owner, you are liable for the repayment of any debt. Remember, authorized users can use a credit card but they are NOT held liable for the debt. But if the debt is not repaid, the credit score and credit history of the authorized user will likely be adversely affected. As a result, it's important to get sole authority over that account if you're a primary account holder or to remove yourself if you're an authorized user.
However, Decker notes, if your spouse relies on that credit card as his or her sole means for buying groceries, gas, and paying bills then you could face legal consequences for taking their name off too soon. Always, always talk to your lawyer first. If you have to keep paying that credit card for a limited time or help your ex open an account in their name, that might be a better option than facing a judge.
2. Joint credit cards
It's in your best interest and the interest of your credit score to close these joint accounts as soon as possible. That's true even if a judge has ordered your spouse to pay the debt. As Decker points out on her website, a judge may be able to order your ex to pay the debt, but that same judge cannot influence the credit reporting agencies. As long as your name is on the account, your credit score is affected, for better or for worse. Fortunately, problems are avoidable, especially if you and your ex are on good terms.
Step one is for each person to obtain new individual credit cards and stop all charges to the joint account. Second, work together to pay off the debt on the joint account. And third, close the joint account as soon as possible. It's important to open the new individual accounts before closing the old ones. Why? Your credit score and history will take a temporary hit when you close the joint account, which could affect your ability to qualify for a new card.
If you have good or better credit, you can find some excellent credit cards and reviews at CardRatings.com. If your credit is not the greatest and you want to build or rebuild your credit, our review site BestPrepaidDebitCards.com can help you find the best card for you if you are in the market for a credit building card (commonly called secured credit cards).
3. Removing a name instead of closing the joint account
If the joint credit card account you have with your ex is many years old, Decker says it may be wiser to remove one of the names instead of closing it. That's because closing an account that demonstrates years of dependable and responsible debt repayment erases what new creditors most want to see: That it's not a risk to lend you money.
Sometimes your ex may not have the income to qualify for new credit. If that's the case, consider removing your name and giving them the card and the associated history. Generally speaking, the debt will need to be paid in full before removing one name.
Homes loans can be especially complicated to untangle. Without the help of a financial planner, you risk making mistakes that can be harmful long after the divorce is finalized. For instance, if the primary wage earner has given the home to the spouse, it's important to understand whether they've also given full liability to the spouse. Or are they still handling monthly payments and keeping their name on the mortgage? If you're still liable for the house after the divorce, your credit score and credit history are still vulnerable.
If you need a worse case scenario to convince you to act, Decker has one on her website. It's a good reminder that seemingly simple divorce situations still may require an objective and skilled financial eye to navigate.
Credit Reporting Freeze
Obviously, not all divorces are amicable. When things get ugly, Decker says breadwinners should consider protecting their credit score and history by utilizing a security freeze to prevent the credit reporting agencies from releasing your credit report without your consent. This protects you from a spouse who may try to open new credit accounts in your name. According to Experian, you will be given a password that will lift the freeze or provide temporary permission to release information. Experian also cautions that placing a freeze will require extra planning on your part when you do want to apply for new credit. Give yourself several days to provide the reporting agency with the following information to lift the freeze:
- Identification verification
- PIN or password the credit reporting agency gave you
- A statement lifting the freeze or naming the person you want to receive your credit report
To make a credit freeze effective, be sure to contact all three major credit reporting agencies - Experian, TransUnion, and Equifax - individually.
Nothing is easy about divorce. I got divorced many years ago and it is the hardest thing I've personally ever dealt with. And while something that seems as abstract as a credit score can easily be pushed down your list of priorities, remember that handling financial matters early in the process will make it that much easier to start over in good financial shape. You will be in my thoughts and prayers. :-)
Co-written by Amy Arnold and Curtis Arnold. Curtis is a nationally recognized consumer advocate and the founder of BestPrepaidDebitCards.com, which provides ratings of prepaid cards and secured credit cards. Curtis also founded CardRatings.com almost 20 years ago.