Splitting with your spouse? You might be worried about who gets the house, who gets the car and who gets the dog. But there's another issue you should think about: your credit.
“Divorce often wreaks havoc on your credit reports,” says John Ulzheimer, president of consumer education at CreditSesame.com.
One major problem: joint accounts. Some couples make the mistake of hashing out these debts — and who's responsible for paying them — in the divorce settlement, then trust their ex to comply, experts say. But a divorce decree doesn't supersede the terms of your agreement with a lender, Ulzheimer says: “So, just because the court orders one spouse to make payments on a loan or credit card, that doesn't let the other spouse off the hook.”
Getting divorced doesn't have to ruin your credit, and there are steps you can take to get out of your marriage while staying in the good graces of the major credit bureaus.
Here are eight ways to keep your credit intact during a divorce:
- Make credit a priority. It's important to let your spouse, your lawyer and the court know that you plan to do everything you can to maintain your good credit, says Dean Binder, a credit expert witness in court cases. Tell your spouse: “'I want to close as many accounts as possible, and we need to work together to get this done,'” Binder says. Point out to your soon-to-be-ex that cooperating on credit matters is in his or her best interest, too, he says.
- Check your credit early. As soon as you decide to get divorced, get a copy of your credit report, recommends Tracy Becker, a credit coach and president of North Shore Advisory, a credit restoration and education company. You can get a free report from each of the three major credit bureaus (Experian, Equifax and TransUnion) once a year at AnnualCreditReport.com. Then, visit a credit counselor or other financial expert to see how the divorce might affect your credit. Binder recommends you sign up for credit monitoring, too, to track your credit during the divorce.
- Pay your bills on time. While you're hashing out the details of your divorce, it's crucial to keep paying your bills by their due dates, Becker says. Your payment history makes up 35 percent of your FICO score, and late payments can seriously damage your credit.
- Nix joint accounts. “Closing joint accounts probably is the wise thing to do,” says Anthony Sprauve, senior consumer credit specialist at myFICO.com. “You want to limit your responsibility to each other as you go your separate ways.” Know, though, that closing joint accounts might cause a dip in your FICO score, since it can lower your credit utilization ratio — the amount of credit you have available compared to what you may owe – he says. But closing joint accounts also will keep an angry spouse from racking up debt before the divorce is final, Becker says.
- Switch service accounts to one name. You might have a slew of accounts that are in both names — think landlines, cell phones, gas, electric, water and maybe even Netflix. Have the accounts put into one person's name, Binder says. Go on a case-by-case basis: For example, if you still live in the home and your spouse doesn't, put the utilities in your name. If the cell account is for your spouse's phone, make sure you won't be responsible for that bill.
- Decide how to deal with a joint car loan. If you owe on a vehicle and the loan is in both names, one spouse can buy the vehicle from the other or you can refinance the loan into one name. “Another option would be to sell it outright and be done with it,” Ulzheimer says.
- Sell or refinance the house. If the mortgage is in both names, refinance the loan into one name or sell the house before the divorce is final, Becker says. Here's a cautionary tale: One of Becker's clients agreed that his ex-wife could stay in their home if she'd refinance the mortgage into her own name. A few years later, he went shopping for a home with his new wife, but got turned down for a mortgage because his name was still on the loan for the house he'd shared with his ex, Becker says. “It got worse,” she says. “Ultimately, his ex-wife stopped paying the mortgage.” The bank foreclosed on the house, and that black mark showed up on the husband's credit report.
- Freeze out your spouse to avoid fraud. In a contentious divorce, you might need to put a security freeze on your credit, Binder says. No lender will be able to open new credit in your name until after you use a PIN and password to lift the freeze, according to Experian. A disgruntled spouse might have your Social Security number, date of birth and other information needed to get credit in your name, and it's not uncommon for one spouse to commit fraud against the other in a divorce, he says: “It happens all the time.”
If you don't take steps to protect your credit now, you might be sorry after you're single, experts say. A worst-case scenario: Your ex could default on a mortgage, car loan or other joint obligation. If that happens, you can end up with charged-off accounts, collections or even a judgment on your credit report, Binder says.
If you've got great credit, a derogatory item can bring your FICO score down 100 or 150 points, Binder says. The lower score could lead to higher interest rates, other accounts being closed and loan denials, Binder says.
“At very least, you need to keep track of what your spouse is doing,” he says.