As someone who’s about to get divorced, surely, you’ve heard horror stories about people whose credit was “ruined” because of their divorce. Is this possible? Yes, absolutely. Can it be prevented? Yes, for sure, if you play your cards right.
It’s important to understand that divorce itself does not affect a person’s credit score. Unlike a bankruptcy, a judgement, lien, late payment, or charge-off, divorce is not reported on your credit report. So, the divorce filing does not affect your credit.
Where spouses run into trouble are joint accounts and co-signed loans. As long as both spouses’ names are on these accounts and loans, any adverse events can affect both spouses’ credit scores. The following adverse events can affect the spouses’ credit scores, regardless if they are getting a divorce or not:
- Late payments
- Accounts included in bankruptcy
If you are ending your marriage and you continue to have joint accounts and co-signed loans before, during and after the divorce, these accounts have the potential to damage your credit. Even if your spouse agrees to pay a credit card account, auto loan or mortgage, if he or she fails to keep up their end of the bargain, your credit will be negatively affected.
Sever all financial ties if possible before the divorce is finalized. For joint credit cards, pay them off and close the accounts if you can. If you can’t afford to pay off the balances, switch them into one spouse’s name alone – the spouse who agrees to take on the debt in the divorce.
As for co-signed loans, such as auto loans and mortgages, refinance these into one spouse’s name alone. If you own a home, you may want to consider selling it and splitting the proceeds with your spouse. Otherwise, the spouse who decides to keep the property should refinance it in their name.
If both names remain on the mortgage, it can affect the other spouse’s ability to buy a new home for themselves since their name remains on the loan. Not only that, but if the spouse living in the house defaults on the mortgage, it will affect both spouses’ credit.