How does my divorce affect my credit?

Decisions made in divorce can affect your credit. Photo by Jelleke Vanooteghem via Unsplash.

The divorce itself doesn’t affect credit one way or the other. But the consequences can.

The main thing to remember is that if you signed or co-signed for the debt, you can be held liable for paying it. The creditors don’t care whether you’re divorced or not.

The easiest way to do this is to pay off your debt with the assets during divorce. For example, if you sell your house, you get rid of the mortgage payments. If you have credit card debt, you can also use the assets to pay them off. Then, once the debt is zero, close them.

Sometimes it’s not possible to pay off your loans so cleanly. For example, if one of you is staying in the house and paying for the mortgage, you won’t be able to sell it. However, you can write language in the divorce decree that specifies what happens if your spouse doesn’t pay the mortgage or associated bills. Safeguard yourself, even if things are amicable right now!

Credit score

As a reminder, your credit score is calculated using a variety of factors. Lenders look at how long accounts have been open, what kinds of accounts you have, missed payments, late payments, etc. Some landlords check credit scores as well.

The better your credit score, the less interest you’ll have to pay on future loans. A high credit score shows your history of being responsible with your credit.

A lower score means you haven’t been in control. You might have missed payments, or made late payments, or have too much credit compared to your income. Because you’re at higher risk for not making payments, you’ll be charged more interest. Lenders must be rewarded for the risk they’re taking on you.

Credit cards

If you have a joint credit card where both of you signed the application, you’re both liable for paying the debt. Hopefully you and your soon-to-be-ex (STBX) are on good enough terms that you can both pay this debt off, and then close the card. If your STBX stops making payments, you’re still liable, even after the divorce.

You can try calling the credit card company to take the other person off the card. There’s no guarantee the card company will work with you.

This doesn’t apply for people who are authorized users on the card. They didn’t sign the application, but they’re allowed to use the card. So if your STBX is an authorized signer, you’ll want to remove them as soon as possible. Otherwise they could run up mountains of debt that only you will be responsible for paying off.

This ensures you know what you’re responsible for, and there aren’t any debts under your name that you didn’t know or forgot about. It’s important to do this before you divide up the assets. You don’t want to take on an asset that has more debt than you realized.

Mortgage

Unfortunately you can’t just take the co-signer off the mortgage. By signing a quitclaim deed you can get them off the title. The loan on the house isn’t changed by taking someone off the title.

The easiest (and cleanest!) way to take care of the mortgage is just to sell the house. After the loan is paid off, each spouse takes their share of the equity for themselves. This solution gives you a clean break as well.

However, not all couples can sell their house outright, for various reasons.

If you plan to stay in the home, you will probably need to buy the other spouse out by refinancing the mortgage.

If you haven’t worked in some time or your income is erratic, this could be harder than you think.

Some divorce decrees allow for one spouse to stay in the house and be responsible for the mortgage payments (without refinancing.) This puts the other spouse in a bind. What if the one who verbally agreed to pay stops paying?

You can put wording in the decree to sell if the mortgage goes past due for some period (say 60 days). The spouse not making the payments is obligated to put the house up for sale, and assist the realtor to get it sold.

Conclusion

Protect yourself and your credit score during divorce. Make sure bills get paid on time. Don’t assume that just because your spouse agrees to something verbally that it will actually be taken care of. Write language into the decree spelling out what happens if the other spouse doesn’t keep their word.

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