Divorce and Credit

Created in collaboration with the credit experts at Experian

Divorce is a very difficult, emotional process. There is a lot to consider, and it may seem overwhelming at times. Financially, it’s important to try to set aside your emotions and take steps to protect your credit. This chapter will answer the following questions about divorce and credit:

• How does divorce affect your credit scores?
• Who’s responsible for credit and credit card debt in a divorce?
• How do you protect your credit before filing for divorce?
• How do you maintain your credit during a divorce?
• How do you repair your credit after divorce?

How Does Divorce Affect Your Credit Scores?

The legal process of divorce doesn’t affect your credit report or credit scores directly. However, there may be financial issues or disagreements involving joint credit accounts with your spouse that can affect your credit history and credit scores.

Although you and your spouse have separate credit reports, joint accounts will appear on both. If you are listed as a joint owner, cosigner, or authorized user, you must separate yourself from the account prior to the divorce.

You must either close the account completely or contact the lender and ask that they change the contract, removing you as a responsible party. The lender may – or  may not – agree to do so.

Who’s Responsible for Credit and Credit Card Debt in a Divorce?

A divorce decree does not break the contract you have with your lender, although that is a common misperception.

A divorce decree specifies who is responsible for accounts opened during the marriage in the eyes of the court, but it does not change the contract with your lender. Only the lender can do that.

You remain responsible for payments on joint accounts — from credit cards and car loans to home mortgages – unless the lender agrees to change the contract. Even when a divorce judge orders your ex-spouse to pay a specific bill, you are still legally responsible under the credit contract for making sure it is paid.

If the spouse responsible under the divorce decree is unable or unwilling to pay and the contract has not been changed by the lender, the late payments still will appear on both credit reports and will hurt both your credit scores and the scores of the spouse you are divorcing.

Even After Divorce, You Remain Responsible for Payments on Joint Accounts

How Do You Protect Your Credit before Filing for Divorce?

• Order Your Credit Report. Before you start the divorce process, order a free copy of your credit report at www.annualcreditreport.com. You then will have accurate information about your credit standing, the debts you owe and who is responsible for them before going to court.
• Close or Separate Joint Accounts. If you can talk to your spouse, you can avoid a lot of financial damage. Analyze all your debts and decide who should be responsible for each. Call your creditors and ask them how to transfer your joint accounts to the person who is taking sole responsibility for payments. You still might have legal responsibility to pay existing balances if the creditor does not agree to release you from the debt.

How Do You Maintain Your Credit During a Divorce?

Keep Paying All of Your Bills: Until you can separate your accounts, neither of you can afford to have late payments on your accounts. During divorce negotiations, send in at least the minimum payment due on all joint bills.

If you miss even one payment, that negative information will stay on your credit report for up to seven years, making it hard to obtain new credit in your own name.

Beware of well-meaning friends and relatives who may tell you to stop making payments or to run up debts. Trying to hurt your spouse by not paying the bill or running up charges will hurt you, too. The best thing to do is make all the payments with at least the minimum due.

Establish Credit Independently: Make sure you have sufficient credit established in your name only so you can begin rebuilding a positive credit history. This is especially important if you have no responsibility for joint accounts from your previous marriage. Without credit in your name, you may be left with no credit history.

• Start Small and Build Up: Apply for a credit card that has a small credit limit. A Montgomery Ward Credit account can be a great place to start. Make a purchase each month then pay the balance in full. After six months, apply for another card. Continue paying your bills on time and keeping your balances low. Ideally, you should pay your balances in full each month, so don’t make charges beyond what you can afford to pay off right away. Just one or two accounts with a consistent record of on-time payments will help you build strong credit scores.
• Ask a Family Member or Friend to Cosign: If you’re having trouble qualifying for credit on your own, perhaps a relative or friend with an established credit history can cosign your loan or credit application. You will share full responsibility for repayment of the debt, so be sure that the payments are all made on time. Remember, any charges also will appear on the cosigner’s credit profile, so making even one late payment will hurt credit scores for both of you.
• Apply for a Secured Credit Card: Your bank or credit union may have a secured credit card program that ties the credit card to a savings account that provides security for your line of credit. Your credit limit will be a percentage of your savings account balance. Be sure to ask if the lender reports the secured account to Experian. Also be aware that some secured accounts include extra fees.

Tips for Maintaining and Repairing Your Credit

Establish Credit Independently

Start Small

Pay on Time

Apply for Secured Credit

Pay Past Debts

Know Your Risk Factors

Find a Cosigner

Keep Credit Balances Low

How Do You Repair Your Credit after Divorce?

Divorce can take a tremendous toll on a person’s creditworthiness. While each person’s credit history is unique, there are some basic steps that you can take to begin improving your credit scores after the divorce:

• Make Sure All of Your Payments Are Made on Time, Every Time. Your payment history is the single most important factor in credit scores. Making your payments on time shows that you manage your credit responsibly.
• Keep Your Credit Card Balances Low. The second most important factor for credit scores is your utilization rate, which is simply the total of all your credit card balances divided by the total of your credit limits. The lower your credit card balances, the lower your utilization rate. Low utilization rates are good for credit scores.
• Pay Off any Past Due Debts. Bring any past due accounts current as soon as you can. If you have accounts on your report that have been written off or sent to collections, paying them off will look better than leaving them unpaid. Paying off collection accounts could help your scores immediately and significantly. The newer credit scoring systems may exclude paid collections from the calculation.
• Focus on Your Credit Score Risk Factors. When you order your credit score, you will receive a list of the factors from your credit report that are most affecting the number. Use those factors to help you make changes that will improve your credit score over time. While there is no quick fix for a low credit score, focusing on the risk factors will help you improve it more quickly.