Minimize the Effect of Divorce on Your Credit Rating

Minimize the Effect of Divorce on Your Credit Rating

Divorcing your spouse almost inevitably takes a toll on your credit rating. Often people find themselves in a situation where they go from a two-income household to a single income, but with the same or similar amount of debt, possibly more when child support or maintenance is awarded. Most people also do not realize that creditors usually will not honor a court order from a divorce because the creditor, itself, is not a party to the case. This mistaken assumption that one is off the hook for a debt simply because their spouse or ex-spouse has been ordered to pay the debt can result in several missed payments and a several point reduction of your credit score that could last for years.

Some of the damage to your credit can be avoided with a little planning and effort on your part. Consider the following steps, possibly even before you file for divorce:

If you have joint accounts with your spouse, do your best to convert them to individual accounts as soon as possible. Depending upon your situation, this may or may not be feasible. Converting the account to individual accounts will most likely require your spouse’s permission, which will probably also require that you tell him/her that you want a divorce. The earlier you get this account divided the easier it will be later in the divorce.

Begin converting your credit card accounts. Similar to the bank accounts discussed above, but sometimes it is easier to accomplish this one. If your spouse is only listed as a secondary cardholder or limited privileges cardholder, you probably will not need to notify him/her of any changes. If it is a joint account, close it as soon as possible so no further charges can be made. Keep in mind that, at the beginning of the divorce, courts will not usually enter orders temporarily allocating debt and people often ignore credit card payments in favor of mortgages and other necessities. However, at least maintaining the minimum payment will usually prevent harsh the harsh interest penalties several cards impose. Additionally, you may be able to contact the card company and request a one or two month “payment holiday.” Your balance will continue to accrue interest, but you will not be reported as paying late.

Start working on refinancing your home and/or car loan. As stated above, divorce will often make a ding on your credit rating. In fact, many lenders subscribe to what insiders call the “scandal sheets.” These are listings of people who have applied for credit or loans, been sued, and filed for divorce. The long story short is, you are in a better position to get a loan either before you file for divorce or even while the case is pending than you are once it is over. Going ahead and at least getting pre-approved to refinance will show the court and your opposing party that you are capable of taking on the debt and often makes the division of property easier. This will also help give you a better idea of what your household budget will look like after the divorce. If you are looking to refinance the house, keep in mind that if there is any equity in the property, you may have to pay your soon-to-be-ex for his/her share.

If you don’t make enough to refinance the car and/or house, it might be better to just sell the property, split the money and move on. It might be heart breaking to have to sell a home you have lived in for years, but it is a better way to guarantee that you will not have to deal with credit damages from a vindictive ex spouse or jumping right into deep credit trouble (i.e. bankruptcy) right after the divorce by over-extending your finances.

You should also consider opting out of receiving pre-screened offers for credit or insurance. A spiteful ex may be tempted to apply for a loan in your name just to ruin your credit. Get the details on this by going to www.optoutprescreen.com. I would also suggest signing up for a credit fraud alert service, such as www.freecreditreport.com, that will alert you to any changes made in your credit report.

Make sure that all payment statements are coming to you. If you continue to allow the statements to go to an address where you and your spouse have equal access, you are asking for trouble. To properly protect yourself, you need to know what bills/payments are out there and for that you need to control them. If you are one of the many people who use electronic/internet billing payment, make sure the creditor has the correct e-mail address for you and that you change all passwords. For more discussion of this particular topic, see the article on this site on Pre-Divorce Planning.

It is best to start planning and protecting your credit as early as possible. Some experts suggest planning as much as six months in advance, but that is not always doable. Nevertheless, even though this may seem like a lot of work at the front end of your separation, it will most assuredly save you from as much as ten years of credit-related headaches in the aftermath.

Sources:
Marshall Loeb, “Learn to Minimize Impact of Divorce on Your Credit” Paducah Sun, Feb. 3, 2008 (orig. printed in McClatchey News Service).

John Ulziheimer, Your Nothing But a Number and various articles at www.Credit.com