Protecting your Credit Rating Through a Divorce
By Kollin L. Rice
Your credit rating can affect whether you can get credit and how much you will pay on credit cards, car loans, and mortgages. It can also determine whether a landlord will rent to you, an employer will hire you, or whether you will even be able to qualify for some jobs.
Divorce is almost always a difficult time both emotionally and financially. Many people come out of a divorce in a worse financial position than they went in. This is sometimes inevitable, with the resources of the family divided into the maintenance of two households. Even if you are able to come out of the divorce with a household income approaching that you had as a couple, it is likely going to be difficult to maintain your standard of living at the pre-divorce level. And it may not be easily to immediately scale down your expenses. To the contrary, establishing a new household, or replacing things taken by your spouse, as well as the costs of litigation may place an additional drain on your finances. Nevertheless, it is important that you maintain (or establish) your credit rating through a divorce. Your ability to keep your house in the divorce, or to get a suitable new one may even depend on it.
Though a difficult task, it is usually possible to take steps to minimize the negative impact of a divorce on your credit rating.
Prior to divorce (or in the early stages)
Separate or close joint accounts. Prior to filing a divorce, or, if your spouse unexpectedly has filed for one, as soon as you can manage, you should take all possible steps to close joint credit accounts or remove the name of the spouse who is not going to be responsible for the account. Even if you carry a balance in an account, it may be to your advantage to close it, which will prevent future charges from being incurred. Joint accounts are very often trouble. You do not want to be dependent on your spouse making timely payments on any account with your name on it. Divorce is financially hard on both parties, with separate households to establish and maintain and attorney fees and litigation expenses to pay, so despite all good intentions, keeping up payments may not be the top priority for your spouse. (And good intentions are not universal among divorcing couples either.)
Make sure you have established credit in your name. If you have not established credit in your name – that is, you have no debts or credit accounts in your name – now is the time to do so. While you are still married, even if separated, it may be easier to get credit than after the divorce. Get a credit card, or preferably two, in your own name without your spouse on the account. Even if you have to get a “secured card” where you have to pay a deposit up front, do it. Use each card for a minimal purchase each month to show activity, but don’t run up a large balance. Pay these cards off in full every month if you possibly can. Not only will carrying a balance have potential to negatively impact your credit rating, but you are almost certain to get stuck with these bills at the end of the divorce, so keep them small. If you can’t pay them in full, make sure you make the minimum payment on time. This might be expensive in the long run, but it will establish an independent credit history. It will only take a few months of this to establish some sort of credit record . . . hopefully a good one.
Get a copy of your credit report. It is important to know what is on your credit report, if only to make sure that everything I accounted for in your divorce. You can get the your credit report free online at www.annualcreditreport.com, though it involves jumping through some hoops. There are other online providers who will offer you a free trial during which you can get your credit reports, but make sure to cancel them. In my opinion, there is little need for most people to use the services of any credit monitoring service or request the credit report more than once a year under most circumstances. You should use the credit report, and any bills and records you have or can get, to make a complete list of all your debts, and determine which ones are joint. You should share this information with your attorney.
Gather information on your spouse’s accounts. If there are files in the home, or bills coming to the home, it is important that you know what’s in them. If you don’t know what the bills are, you can’t make sure to pay them. If a divorce is pending, or even a possibility, you may benefit from having copies of all bills, tax returns, and financial records (including pensions and investments) kept out of the home where your spouse cannot abscond with them. Though these records can usually be re-created, this may require significant delay, trouble and expense.
Keep up your payments. It is crucially important that you keep up your payments during the divorce. It is also important that you make every effort to make the payments on time. To best preserve your credit you need to make sure that you pay all the bills in your name (including joint bills) on time. However, if you can’t keep them all up, some are more important than others: First, make your mortgage payment (and second mortgage if applicable). Your mortgage stays on your record a long time, and should it come to a foreclosure, that is a big blow to your credit. Second, make your car payments. Cars get repossessed more often than any other asset. Not only will you have a bad payment record and lose a valuable tool, but after the repo, you will in all probability be stuck with a deficiency. This will be listed on your credit report as a bad debt, or perhaps ultimately a judgment against you in a significant amount, compounding the damage. Third, pay other secured debt, for the same reason you pay your car note. Fourth, pay credit cards. Make the minimum payment if necessary, but don’t just stop paying. Although eviction and getting your utilities shut off are likely things you would rather avoid, most landlords and many utilities do not report your late payments or non-payments to the credit bureaus. Further, most of them are moderately understanding if you contact them and explain the situation before you miss a month or make a partial payment. Most utilities will let you go a month or two without cutting you off, and give you explicit advance notice and an option to prevent shut-off before they actually do it. Further, you may be able to qualify for assistance in keeping electricity and gas on when your spouse‘s income is no longer in the household.
Considerations in the Divorce Settlement
When dividing the debts, it is generally a good thing for you to be responsible to the accounts in your name and not those in your spouse’s name. It is even better if you name is not on any accounts that your spouse is responsible for paying. Late payments on accounts in your name will affect your credit, whether or not you were the person responsible for the payment under the divorce decree. However, it is not always easily to equitably divide the debt in this manner. If your spouse ends up responsible for paying a bill that is in your name, the court will usually order that reasonable attempts be made to refinance the debt to remove the non-liable spouse’s name. However, if your spouse has bad credit, that may not always be possible. If your spouse ends up ordered to pay a bill in your name, it will be important that you keep track of it anyway to make sure it is paid, and to hold your ex’s feet to the fire to make sure it gets taken care of.
After the divorce
Once the divorce is complete, you will need to divide any accounts that were not yet resolved. You may also be in a position where you are required to refinance a mortgage, a car loan, or other debt. (This is one of the reasons it is so important to preserve your credit during the divorce. If you are obviously not in a position where you could refinance the debt, that is sometimes a factor in whether the court awards you the underlying asset.) When refinancing debt, my suggestion is to shop around a little. Consider what on-line options there may be and whether you can get a substantially better rate with a lender other than your original one. I would probably check at www.bankrate.com to assess current mortgage and car loan rates. Even if I don’t go with the lenders I find there, it is useful information to make sure you aren’t paying substantially above-market rates.
A few months after you have sorted out everything, you should probably get another credit report. Check to make sure that accounts that are supposed to be closed actually have been. Make sure none of your ex’s stuff is popping up on your credit report if the account is no longer joint. It’s probably a good idea to continue to check your credit report annually – sometimes weird stuff pops up after a divorce. And sometimes divorce makes you vulnerable to identity theft either by your ex, or by people who may find your financial information through court records.
 It may also be advisable to separate joint bank accounts, though that can be complicated by court rules and other financial considerations beyond the scope of this article.
 If your ex has good credit and the listed account is in good standing, there may not be a hurry to get it off, as it might be benefiting your credit, but make sure the creditor does not have you listed on the account anymore.
 Although courts are now much more protective of your personal information than they used to be, divorce court records are still available to the public in most cases, and a clever person bent on identity theft could still probably put together enough information to get started in many cases. Just having names, birth dates, addresses and names of creditors might be enough to go on.