This is a guest post by Tim Chen who is the is founder and CEO of NerdWallet.com, a website that helps consumers to compare credit card offers. Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and U.S.News.
The Golden Rule: If your name is on a contract with a creditor, no court order can negate your liability.
If your former partner stops paying a bill with your name attached to it, even if a court decided that the liability or loan belongs solely to the ex-spouse, you will start getting calls from the collection agency. Therefore, it’s wise to divide all loans and financial contracts so that they fall under only one person’s name. This includes auto loans, home mortgages, credit cards, and insurance policies.
If you’re going through a divorce, there are certainly a lot of financial considerations to address. One of the most important of these is your credit. As you begin to establish a new life you will need a favorable credit score to rent an apartment, start bank accounts, apply for a credit card and possibly even get a job. Here are a few financial pitfalls to be aware of before signing the final papers.
Lack of Credit
If you’re a stay at home parent, you may think you have very little or no credit but that is most likely not true. If you opened a joint credit card, mortgage or other loan, it is not only on your spouse’s credit report but also on yours. Providing you have a stellar payment history, these loans should not have had a negative impact on your credit score. In fact, you should have a favorable FICO score. If you do have a limited credit history, opening a low limit credit card or secured credit card account should set you on the right path.
Debt Load
Although your credit score may have been close to perfect, the divorce could cause some damage. One way this will happen is in your debt utilization. As a married adult, you most likely have or had credit cards and other loans that gave you a total amount of available credit (like a home equity line or a credit card limit). If those joint accounts will be cancelled upon divorce, the amount of available credit you have will go down and whatever part of the balance you have to pay will have to be moved to a new credit card or home equity line. This means your debt stays in place, but your available credit goes down. Increasing your utilization ratio like this can have a substantial negative impact on your credit rating.
The best way to avoid this is to agree to pay off joint debts before divorce. Of course that isn’t always possible, so the next best option is to divide up accounts in such a way that each partner has a fair share of the total debt to deal with after the divorce, potentially even using balance transfer credit cards to divide loan balances onto new non-joint cards.
Trusting your Spouse
Most divorces aren’t as heated as the drama-filled episodes we see on TV. In fact, many people work out terms that give both parties some leeway in getting all of their financial affairs in order. But be careful of any arrangements that don’t sever all ties completely.
Imagine this scenario: Mike and Molly have decided to divorce and instead of selling the home and splitting the profits, Molly is purchasing the home from Mike. They work out a deal where within 6 months Molly will refinance the home and pay Mike. During that time, Molly is paying 100% of the mortgage.
Four months later Mike tries to take out a loan and finds his credit ruined. Why? Molly wasn’t able to pay the mortgage and now Mike’s on the hook! Remember that although you used to be married to this person, you are about to be your own person. Would you trust anybody else with your credit?
To avoid problems like this, break all financial ties when the divorce papers are signed. Don’t trust your soon-to-be-ex (or anyone else) with your financial health. Divorce has the potential to do damage to your credit and financial well-being, but with some awareness and smart financial planning, you can lessen the negative effects considerably.
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An older friend of mine when thru a divorce 10 some years ago and it nearly ruined him financially. First of all, the attorneys are the ones who made off like bandits. Then his x-wife scavenged the rest. One good thing he had going for him was his faith and belief in God. Additionally his wife took care of their two daughters and raised them well. I guess one can always see light in every situation if they choose to look.
Wil, divorce usually financially hurts one or both parties. I know, I speak from experience. But, money is not worth long term unhappiness.
I would not trust someone else with my mortgage, soon-to-be former spouse or not. I think that might even be more reason to be careful. You ARE getting divorced, right? Your insurance for staying on top financially is watching your own back. It always leads to the safest results.
Jerry, great advice. Some people are too trusting of their former spouses but I understand the tendency.
One thing that really helped me to build my credit was to take out a small personal loan at a local bank. I had them secure it with a CD that I opened of an equal amount. That way, there was no risk for them, and it built my credit score!
Great idea, Jacob. Fortunately, I did keep some of my money and credit history separate during my first marriage (and still do today).
That’s good to hear! That may be a mistake that some of my friends make as they start to get married here in their early 20’s.
Great post, hopefully I’ll never have to use that information, though! It’s always good to maintain your own identity, even if that also means financial identity (credit score, debt load, etc)
Young and thrifty, I hope you never do! The advice to have a separate financial identity is good for everyone.
Good tips. I would say always keep some things in both personal names while you’re married. For example, the mortgage has both names, you have a shared credit card and so on but both of you have their name in a personal car loan or another credit card or whatever else. So you are building a “couple” credit score and a personal credit score at the same time. Everyone is happy!
Oh, and if everyone is happy, chances are you will not get divorced!! 😉
Money fights is the leading cause of divorce, right? Good advice!
Had to smile at this post … I generally consider myself to be on the ball when it comes to money but your post is spurring me into action this afternoon! I’ve been divorced for about three and a half years now. My ex and I kept a joint account because we rented out our marital home for a while after the divorce was final. It sold about a year ago. I withdrew my share of the money and left the balance there for my ex. The account still shows up on my ebanking and I saw last week that it was overdrawn – not by much but that did prompt a phone call to my ex to ask him to clear the overdraft and close the account. The overdraft is now clear but the account is still open…. so guess I’m headed to the bank.
Mandy, it took me many years to disentangle myself financially from my former husband. I’m glad this post reminded you of an task that needed finishing!
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