4 ways you can destroy your credit during divorce
By Tina Orem
April 20, 2015
There are enough regrets when it comes to divorce. Don't compound them by making credit mistakes after the split.
From promising — and failing — to make payments on the mortgage to ignoring your credit reports, you can carry the load of a bad divorce for years to come through a poor credit score and iffy credit.
Here are four terrible decisions that can help you tank your credit when you are going through a divorce, and what you should do instead:
Bad decision No. 1: Stop making payments on a loan because your ex says he will make the payments, or because you think the associated asset is your ex's problem. Your ex's problem is going to be your problem, too. “It is not enough for a judge to assign the debt in a divorce decree. Instead, the debt must be separated by a lender,” says Michelle Black, a credit expert at HOPE4USA.com, a credit education and restoration program in North Carolina. “For example, if you and your soon-to-be-ex are joint borrowers on an auto loan that your former partner will be keeping, then he or she should refinance that vehicle into his/her name only. Otherwise, you are still legally on the hook for the debt, regardless of what the divorce decree states.” In other words, promises and physical possession aren't enough to get creditors off your back. Either refinance the debt to ensure it's in your ex's name only, or be prepared to make the payments yourself.
Bad decision No. 2: Talk your ex into giving you the house, even though you can't really afford the payments. “If you and your spouse purchased a home that neither one of you can afford to maintain on a single salary, then it would be in the best interest of both parties to sell the home and split any profit received,” Black says. Just being 30 days late on the mortgage can lower your credit score by almost 100 points, according to FICO research. If the hole gets too deep and you end up in a short sale, a person with a 780 score (perfect is 850) could fall to a 620. For those reasons, Black says it's important to talk about the house before divorcing. “Ask your soon-to-be-ex: 'Would selling the [asset] be something you are willing to consider in an effort to protect both of our credit reports and scores?'” she said.
Bad decision No. 3: Let your credit cards and other joint accounts stay open. Chances are your spouse is a joint account holder or at least an authorized user on one of your credit cards, and that means he can make purchases. “If their partner still has access to their accounts, they have the availability to damage their credit without repercussions; therefore, remove them as an authorized user ASAP,” cautions John Heath, an attorney at Lexington Law in Salt Lake City. Better yet, “If you have joint credit cards, pay them off prior to your divorce settlement,” and close them, said Lora Murphy, a CFP and certified financial divorce analyst at Wipfli Hewins Investment Advisors.
“No matter what the divorce decree says, each person will be held accountable for the debt, so it is better to remove them completely beforehand, or even better, close the accounts completely if possible,” says Steve Repak, a CFP in Charlotte, North Carolina.
Bad decision No. 4: Assume your ex can't or won't harm you financially. Revenge debt is real, and one of the best ways to cut it off at the pass is to get in the habit of checking your credit report often. Because you're entitled to a free credit report once a year from each of the three reporting agencies, you can actually check your credit every four months by going to AnnualCreditReport.com and staggering your requests. Order your Equifax report in, say, January, then order your TransUnion report in May and your Experian report in September.
Also, consider putting a freeze on your credit files, Repak says, which means most lenders will not be able to access your credit reports, which can prevent someone from opening new lines of credit. “It may protect you from your ex being able to open an account, rent an apartment, etc., in your name that requires a credit report,” Repak explains. However, you need to time the freeze, because lenders, insurance companies, landlords and even utility companies will want to see your report before they will do business with you. You can temporarily “thaw” your files with a PIN that is issued to you when the need arises, although you may be charged a small fee each time you place or lift a freeze, depending on the state you live in.
Perhaps the best way to keep your ex from tanking your credit in a divorce is to realize you're both in the same boat. “Making a solid plan to protect your credit and the credit of your soon-to-be-ex is truly in your own, personal best interest,” Black cautions. “If you do not take steps to ensure that your former partner's credit is protected, then you can bet the bank that he or she probably will not care about protecting your credit either.”