Divorce is hard enough without suffering the extra burden of financial repercussions brought on by your former spouse, but if you do not take precautions, the implications of divorce and credit scores could make the split even harder.
If you are going through a divorce, you should protect your credit by refinancing your home and canceling any joint credit card accounts or removing your name from authorized user accounts (or your spouse's name, if you are the primary cardholder).
Consider Sheila, a client who came to me before reading 7 Steps to a 720 Credit Score (Philip Tirone, 2008). Sheila was applying for a home loan after going through a divorce. Her credit report was a mess: she had more than a few late payments and several late payments. Upon second look, she had another mortgage that was dangerously close to being foreclosed upon.
Sheila went on to explain that she had left her marriage quickly, leaving the home to her ex. In the flurry, she had not prepared for the repercussions of divorce and credit scores.
Joint credit cards had remained open. Her ex said he thought she was paying the bills; she thought he was paying the bills. Because she had moved out of the house, Sheila wasn’t even getting the late payment notices.
And in his depression, her husband had not taken care of his finances. He started showing up late to work, calling in sick. Eventually, he lost his job and stopped making payments on the home. Sheila explained that he was attempting to receive a loan modification. In the meantime, the house payment was 120 days past due.
“I don’t understand why this happened,” said Sheila. “I have a divorce decree and a quitclaim deed. Isn’t that enough to protect myself from the problems associated with divorce and credit scores?”
I explained two key factors that relate to divorce and credit scores:
Divorce and Credit Scores—Consideration #1: The quitclaim deed and divorce decree are not enough. If you own a home jointly with a spouse, the bank considers it your joint obligation to make payments on the home. In other words, the agreement you had with the bank remains in effect until one spouse refinances in his or her name.
Consider what would happen if your ex retains ownership without refinancing. Your credit will be damaged if your ex becomes late on a payment. Regardless, if you try to qualify for another home loan, you might be denied if you have an existing mortgage on your credit report.
And if you and your ex agree that you will retain ownership of the home, what happens if you ex is sued? The courts could attach a lien or judgment to your ex’s property, and if you have not refinanced in your own name, this could include your home!
Divorce and Credit Scores—Consideration #2: For the same reasons, you should make a plan to separate any and all jointly-held accounts. This includes credit cards and auto loans. You might need to cancel joint credit cards, though you might be able to transfer the card into one spouse’s name. Call your bank to inquire about the procedure.
Yes—as you can see, with regard to divorce and credit scores, it is far better to take immediate action to protect your credit during and after a divorce!