Editorial Policy

How to protect your credit in divorce

Eva Norlyk Smith Ph.D.

August 18, 2014

QDear Eva,

My wife and I are separated, and we're talking about divorce. When it comes to finances, are there any first steps I should take to make sure my credit doesn't take a hit? –Christian

AHi Christian,

I'm sorry to hear about your situation. Separation and divorce are never easy, and if disagreements and complications around finances enter the picture, the repercussions can last for a long time.Ask Eva

So yes, being proactive and looking ahead is critical, particularly when it comes to your credit. There are many ways that jointly held credit accounts can trip up couples, particularly if things get ugly. Here are some steps to take to minimize any damage:

1. Pull your credit report.  Most people have multiple credit accounts they have long since forgotten about, and chances are that some of those accounts are jointly held.  Check your credit report for these kinds of accounts. They may include car loans, store credit cards you opened a long time ago and rarely or never use or an unused home equity line of credit. You can get a free copy of your credit report online at AnnualCreditReport.com.

2. Make a list of the jointly held accounts by type. There are two types of shared credit card accounts: those that are truly joint accounts, and those on which one spouse is an authorized user. There is a significant difference between those two, which becomes particularly important during a divorce.

For accounts where one person is the authorized user, only the account owner is responsible for the balance, while the other person is simply allowed to use the account. So, if your spouse is an authorized user on credit cards in your name, any charges she incurs would be your responsibility. (Note: This doesn't apply if you live in community property states such as Texas and Arizona. In community property states, all debts acquired during marriage are usually considered jointly owned).

3. Cancel authorized users. In short, if you or your spouse — or any of your kids for that matter — is an authorized user on a credit card, ask the card issuer to remove the person as an authorized user. If there is a balance on the credit card account, technically, the primary account holder is responsible for paying off that balance, so be sure that this gets taken into account when negotiating the financial settlement for the divorce. Ideally, you and your spouse would zero out any balances prior to the divorce to make the break a clean one. Removing authorized users from your account will ensure that no further charges are incurred.

It's also best to remove yourself as an authorized user from your spouse's credit card accounts, as negative credit behavior on the part of your spouse could potentially affect your credit. Ask the card issuer to remove your name from the account.

4. Beware of jointly held credit accounts. When it comes to joint accounts, things get tricky. Many people assume that they can divvy up debt obligations in the divorce decree in the same way as they can divide assets. But, a divorce decree does not change the obligation you have to the lender to pay back the loan.

For example, couples often agree that one spouse will get the house and take over the mortgage. However, as long as the other spouse's name remains on the mortgage loan, that spouse has an equal obligation to pay the mortgage — even if he or she no longer lives in the house. It doesn't matter that the divorce decree stipulates that the spouse who gets the house will refinance the mortgage in his or her name. If he or she fails to do so or can't get approved for a mortgage because of a changed financial situation, the other spouse is still on the hook for the loan. The same thing applies to credit cards and any other joint loan.

So for all jointly held accounts, make sure your debt obligation gets removed through the lender, not through the divorce decree.

Before you enter divorce proceedings, pay off any joint accounts you can and close them. When that is not possible, agree to transfer balances in equal amounts to individual credit cards, so you each take over a similar share of the debt. For mortgages, if one spouse is taking over the house, make sure that the refinancing of the mortgage is taken care of before finalizing the divorce decree. The same thing applies if you have a joint car loan, and so on.

Last but not least, don't forget to consider the basics: If you cancel some credit cards, it may affect your credit score. You may want to open some new credit cards in your own name to make sure the credit limit you have access to remains the same. Also, make a budget to ensure that you will still be able to meet all financial obligations once you no longer have access to a joint income.

By staying on top of the financial matters, you can find a way to make the process less painful for both of you.

Got a question for Eva? Send her an email.