Divorce is painful. In addition to the emotional and familial challenges, divorce can also affect your finances. And that brings us to a question I’ve heard from a number of people: How does divorce affect your credit?
First the good news. Divorce itself does not have a direct effect on your credit, credit history or credit score. Your marital status is not used to assess your credit worthiness, and that’s true whether you are divorced or not.
Now to the not so good news. Divorce can indirectly affect your credit in several ways. Because many married couples have some joint financial obligations, the way you handle the financial separation will determine if and how your credit rating changes. Understanding the potential impact can help you plan ahead and avoid costly mistakes.
The Divorce Decree
As a starting point, it’s important to understand that the divorce decree by itself does not change your financial obligations to your creditors. Whether by settlement or court order, one spouse may be ordered to pay off a given debt, say a jointly held credit card. While that decree will be binding between the former spouses, it does not bind the credit card company.
So even though one spouse is obligated to pay the debt, the creditor can seek collection from either party. What’s more, if the party obligated to pay the debt makes payments late or fails to pay at all, both spouses will end up with a negative item on their credit reports and a lower credit score.
With that understanding, let’s look at a few specific types of debts and what you can do to protect yourself and your good credit score.
Joint credit card accounts are common with married couples. Every credit card my wife and I have are joint accounts. During a divorce, the safest bet is to have your name removed from those credit card accounts you are not obligated to pay. Once your name is removed from the account by the credit card company, you’re no longer on the hook to pay off the card. And if your former spouses fails to pay, that failure will affect his credit only.
If you were married for any length of time, you and your spouse might have bought a house together. Even if only one of you makes the mortgage payment, you are both most likely on the mortgage loan. When you get divorced and one spouse continues to live in the house, you are still both on the hook to pay the mortgage.
The best solution is to sell the home. Where one spouse plans to stay in the house, the sale can be to that spouse if he or she has the financial ability to qualify for a mortgage. And that’s where things can get tricky.
In some cases, a spouse is permitted to stay in the house until the children are grown. After that time, the house must be sold and the proceeds divided between the former spouses as set forth in the court order or settlement. Until that time, however, it may be impossible to remove either party from the mortgage.
In that case, the non-paying spouse (if only one spouse pays the mortgage) will need to be vigilant in keeping an eye on the mortgage payments. While your options may be limited should your former spouse fail to make a mortgage payment, knowing the problem exists is the first step in attempting to address it. In many cases, judicial intervention may be required if the issue persists.
Auto loans are typically much easier to address than a mortgage. Not only are the amounts at issue much less, but a car loan is much easier to refinance. The car can be titled in the name of the spouse who will retain it, and that spouse can refinance the auto loan in his or her name only. Once the refi is complete, the spouse who is removed from the title and loan will no longer be responsible for future payments.
Finally, it’s important to keep track of your credit score if you believe your spouse or former spouse may be hurting your credit. There are several low cost credit score options that will track your credit file and alert you if negative items appear on your credit file.
And here are some resources I’ve found for additional reading on this topic:
Credit and Divorce (via the Federal Trade Commission)
How does divorce affect a person’s credit (via Experian)
What does divorce do to my credit? (via Equifax)
Published or updated August 3, 2012.