Not only can divorce lead to emotional strain, it can also cause all sorts of financial problems. All those shared accounts and co-signed loans that once seemed so romantic can now cause major money issues — for you and your ex. Some financial problems will ultimately be sorted out in your divorce decree, but a lot can happen in the interim, particularly when it comes to your credit. And credit problems can persist so long as those joint accounts and co-signed loans we mentioned stay intwined. Let’s review how divorce can affect your credit — and the steps you can take to protect it during the process.
Does Divorce Damage My Credit Score?
Not directly — meaning the divorce itself shouldn’t show up on your credit report and credit scores don’t account for your marital status. Scores will account, however, for any missteps resulting from the divorce that affect their five major categories:
- Payment history
- Amount of debt
- Credit Age
- Credit Mix
- Credit inquiries
In other words, let’s say a large sum of credit card debt on a joint account is being sorted out as part of your divorce settlement. Joint accounts appear on both parties’ credit reports — and any missed payments, burgeoning balances, charge-offs or collection activity related to that account will, too, so long as a person’s name remains on the account. As such, ignoring the account while the lawyers work out how this debt will be addressed could do big damage to your credit score. (You can see how joint accounts related to a divorce may be affecting your credit by viewing two of your credit scores, updated every 14 days, for free on Credit.com.)
Something else to keep in mind: Unpaid child support can appear on credit reports as well and affect your scores, so it’s best to stay on top of any payments your divorce decree requires of you, even if those terms become contentious.
Let’s break down how divorce affects your credit a bit further. The following three important tips can help avoid financial damages due to a divorce.
1. Understand Divorce Decrees
During a divorce, the courts will divide up responsibility for shared debts through a “divorce decree.” For example, the husband may be made responsible for paying the mortgage and the wife may be made responsible for paying the auto loan.
Most consumers assume that this division carries over to the actual accounts and many divorce lawyers perpetuate this myth. In reality, divorce decrees do nothing to end responsibility for shared accounts. Because the financial institution that issued the loan is not a party to the separation agreement, it will not change anything about the way the account is managed or reported to the credit bureaus.
Many divorced couples run into financial problems a few months after a divorce when an ex-spouse starts making late payments on a shared account. These late payments appear on both of the account holders’ credit reports, despite divorce decrees. This double reporting is both legal and accurate. Once the records appear on your credit report, there is nothing you can do to remove them until their natural 7-10 year expiration date.
In order to avoid these issues, divorced couples should close or refinance all shared accounts. Any shared credit cards, loans, and mortgages will continue to be a joint responsibility until you work directly with the financial institution to resolve the issue.
2. Manage Shared Accounts
It is not always possible to close or refinance all your shared debts after a divorce. Mortgages and large loans can be difficult to refinance quickly. In this situation, it is important that you and your ex work together closely to manage a shared account. Remember: your credit will be damaged if your ex cannot manage the shared account responsibly, and vice versa.
One of the easiest ways to manage a shared debt with an ex is by setting up an online account. This way, you can both easily login to check on the payment status of the loan. If you see that the debt has not yet been paid for the month, you can contact your ex or decide to pay the bill yourself in order to avoid a late payment and damage to your credit score. Encourage your ex to sign up for automatic payments that will deduct the bill from his or her accounts each month.
Payment troubles arise after a divorce for many different reasons. It may be that your ex is not used to managing bills each month or that he or she is struggling with a new budget. In some cases, the financial damage may be intentional. An ex with bad credit may decide to ruin his or her former spouse’s credit by not paying a shared account. Keep in mind that negative records, such as charge-offs, liens, and bankruptcy filings, related to shared accounts can also appear on both account holders’ credit reports. It is advisable to continue working with your ex to manage your shared finances after a divorce.
Recently divorced borrowers can build their independent credit history by opening up a new credit card account. Using a credit account responsibly each month has a positive impact on your credit scores.
3. Protect Your Identity
It is a sad truth, but many couples go through messy divorces that leave both parties as bitter enemies in the end. When this is the case, it is important to consider the potential damage that a disgruntled spouse could do to your credit. Armed with your Social Security number, birth date, and other financial details, an ex could potentially steal your identity and cause significant damage to your credit.
After a contentious divorce, you should take a few steps to guard against any possible identity theft crimes. Sign up for a credit monitoring program that immediately alerts you to changes in your credit data. Be on the lookout for suspicious mail and signs that new accounts have been opened in your name. Change your online banking passwords and request that your account numbers are changed. If you suspect identity theft, contact the credit bureaus immediately to place a 90-day fraud alert on your credit reports.
Most importantly, simply be aware of your possible risk for identity theft. According to a 2005 identity theft survey by the Better Business Bureau, 50% of identity thieves turned out to be relatives, close friends, and neighbors of the victim. Denying that your ex could steal your identity may cause you to miss important early signs of fraud.
Going through a divorce can be very stressful. Trying to keep yourself together is hard enough without worrying about your financial situation. However, awareness of the major risks and some headwork to protect yourself now can be extremely helpful in the long run.
This article has been updated. It originally ran on October 17, 2013.