Divorce can be amongst the most painful experiences one will ever go through. You and your (former) spouse will spend money on lawyers. You’ll have to figure out how to divide up your assets (such as your home, bank accounts, vehicles, and more), and your debts. Perhaps most difficult of all, you’ll need to resolve custody of your children.
A divorce can also have a major impact on your FICO score, and thus your financial health more broadly. Let’s take a look at some of the major considerations around divorce and credit scores – and how to protect yourself.
1. Divorce agreements Don’t Cancel Your Obligations To Pay Joint Debts
Let’s say in the final divorce agreement, your spouse agrees to pay all debts on a joint credit card (obtained in both of your names). He or she fails to do so.
The credit card company can still report the debt on your credit reports, damage your credit score, and perhaps even sue you on this debt. Why?
The divorce agreement was between you and your spouse, not you, your spouse, and the credit card company. When you signed up for a credit card, you agreed to pay the amount owed and interest, regardless of what happened in the future.
So, what’s the solution? You should make required payments on the card. Failing to do so will cause major harm to your credit score.
You should also return to court. You’ll want to request that the judge order your spouse to reimburse you for the money you paid, because they violated the divorce agreement.
Typically, this process is much easier if you have a lawyer’s assistance. Your attorney from the original divorce can possibly help you.
By the same token, if you agreed (or are ordered) to make payments on a joint credit card, be certain to comply with the order. Otherwise, you could find yourself back in divorce court, dealing with a frustrated judge, and your former spouse.
2. Removing Your Spouse As An Authorized User
If your spouse is an authorized user on your credit card, he or she is allowed to spend on the card, without being responsible for making payments on the card. This is a risk for you. What if he or she decides to run up charges on the card, perhaps out of anger towards you? In this situation, your credit will suffer, as your former spouse racks up excessive balances, raising your debt ratios, which, as we’ve discussed, counts for 30% of your credit score.
What’s the best way to handle this problem? Simple: Remove your spouse as an authorized user on the card, as soon as possible. By doing so, you can avoid any unpleasant surprises on your credit card statements, or, for that matter, your credit reports.
3. Adjust Your Spending Accordingly
A divorce often means a major decrease in income, which leads to reduced spending power. For lots of folks, lifestyle adjustments are rather difficult, and they overspend on credit cards, or take out personal loans, which they often cannot afford.
For this reason, you’ll want to take a careful look at your income and spending, and figure out exactly what you can afford. Avoid unnecessary purchases, and look into how you might go about increasing your income, to limit the impact of these sorts of reductions. Mint is a good tool to help you budget smartly, and manage your finances. You might also want to speak with a qualified financial advisor, and learn how to best manage your finances post-divorce.
4. Monitor Your Credit
This is something you should do regularly even if you never went through a divorce. Credit must be monitored on a regular basis, in order to prevent any errors or unexpected surprises. Sign up with Credit Karma to keep an eye on your TransUnion and Equifax reports – for free.
Specifically, check the section which lists inquiries, to make sure that no one has applied for credit in your name, as well as the accounts section, to make sure that no payments have been missed (this is especially important for joint accounts, which were part of the divorce).
Keep in mind that the credit score offered by Credit Karma (known as VantageScore) is not used by most lenders. Rather, the majority of lenders use some version of FICO, a different credit scoring system. So, you shouldn’t pay too much attention to the credit scores you get from Credit Karma.
You should also sign up with freecreditscore.com to monitor your Experian credit reports in the same way. Unlike Credit Karma, freecreditscore.com does offer a FICO score, which you should pay more attention to.
5. Prevent Identity Theft
One of the most common concerns people have after a divorce, is being at risk of identity theft. After all, your former spouse probably knows your Social Security Number, date of birth, and other information required to apply for credit. What if they apply for credit illegally in your name, damaging your credit, while racking up thousands of dollars in bills?
First, remember that if you are a victim of identity theft, the law is on your side. You won’t be responsible for spending in your name, as long as it’s reported within a reasonable time after you discover what happened. The FTC offers an excellent identity theft guide, to help you figure out what to do, if this happens. What’s more, identity theft is a crime punishable by prison,
Second, consider freezing your credit. By doing this, no one will be able to apply for credit in your name, unless they provide a special PIN number, which only you have access to. In most states, freezing your credit carries a small fee (unless you’ve already been a victim of identity theft, in which case it may be free). You can freeze your credit for Equifax, Experian, and TransUnion, at the links included here.
The Final Word
There’s no doubt that divorce is a terrible experience. Yet, if it does happen, following the strategies above can preserve your financial health, and make the path forward much easier. The most important thing to keep in mind is that you need to be proactive. By taking these steps early on, you’ll protect your credit, and ultimately your finances, for many years to come.
