Your marital status doesn’t ordinarily impact your credit rating. So the act of getting divorced, in and of itself, isn’t a concern in that regard. It’s what can happen as a result of the divorce that could be problematic.
In the course of your divorce, it’s imperative that you address joint debt. This is debt for which you and your spouse are both responsible. Because the vast majority of divorces settle before trial, how to handle debt issues is something you and your spouse can generally control.
To avoid potential problems down the road, the ideal way to resolve joint debt is to pay off those accounts during your divorce, then close them. If you can’t reach an agreement to do that—or if it’s not financially feasible—you and your spouse will likely each accept responsibility for paying certain accounts after the divorce. But be forewarned. . .your divorce judgment isn’t binding on your creditors.
In light of that, if your spouse doesn’t make the payments on a joint account, that’s going to negatively impact your credit. As far as the creditor is concerned, you’re still liable. As a practical matter, you might have to make the payments yourself, at least until you can get back into court to force your spouse to comply, and to seek reimbursement.
There are methods to minimize your risk. Regarding credit cards, you can request that the credit card company close the account to avoid further charges, so the spouse who's paying the outstanding balance doesn’t have to worry about the other spouse continuing to use the card. (Consider speaking with your attorney about closing joint credit card accounts at the inception of the divorce, to avoid runaway charges while the divorce is in progress.) You should also check to see if closing the account will negatively affect your credit score. If it will, you’ll have to weigh that against the risk involved in keeping the account open.
If there’s a jointly held auto loan, but one spouse is keeping the car, see whether the creditor will recast the loan to remove the other spouse’s name. Likewise with a mortgage—if the divorce calls for one spouse to get sole title to the marital home, every effort should be made to require that person to refinance the mortgage so as to relieve the other spouse from any obligation.
If you’ve settled your case, it’s best to include your plans regarding joint debt in the divorce settlement agreement your attorneys will prepare, which may also be referred to as a "Marital Settlement Agreement," "Property Settlement Agreement,” or “Separation Agreement.” That document will then be incorporated into your divorce judgment.
This topic is really a melting pot of scenarios that can pose potential problems. Paying your legal fees is one example. Contested divorces aren't cheap, and paying your attorney everything you owe can be difficult. Although many attorneys will work with you on payments, that’s not a sure thing. And if the lawyer opts to send your bill to collection, your credit could suffer.
Also, after the divorce, you and your ex will probably be living in separate residences. That means you’re going to have to maintain a household without the benefit of your spouse’s income, other than any spousal support (alimony) you may receive. (Note that courts today are generally awarding alimony for shorter periods of time than in the past.) So unless you’re well-off, it’s possible you may have trouble meeting your everyday expenses. Falling behind on payments translates to a lower credit score.
There’s not much you can do about legal fees, other than trying to settle your case as soon as possible, to keep the fees to a minimum. But as to your living expenses, you should consider setting up a budget to help you live within your means. Granted this may entail a lifestyle change, but it will serve you well, especially if you need to apply for credit in the future. However, if your financial status increasingly deteriorates, despite your best efforts to control expenses, you might need to consider bankruptcy.
There’s something else to be aware of. You may look to your credit cards as a means of catching up with your expenses. But even if you make your monthly payments on time, utilizing too much of your available credit can have a negative impact. Credit scores are based in part on your perceived ability to pay what you owe. The more debt you incur, the greater the chance you’ll have a hard time paying it back; hence, a lower credit score.
Contested divorces have a tendency to bring out the worst in some people. If you're divorcing someone who can’t seem to let go of the bitterness, you need to keep a sharp eye on your credit. Remember, a spouse probably has access to all the personal information needed to set up a bogus account in your name. Also, make sure to stay on top of joint debts, especially that first year after your separation. Your ex may be receiving notices of debt that you owe, and not informing you. You may not even know about a certain debt until it has already been sent to collections.
If you believe your spouse is capable of this kind of behavior, it’s probably wise to subscribe to a credit monitoring service that notifies you immediately of credit activity. At the very least, utilize your right to a free annual credit report from the major credit reporting services: Experian, Equifax, and TransUnion.
Instead of ordering a report from all three at once, you might want to consider doing it in intervals of four months. In other words, order a report from one service, then four months later order from another service, and, finally, obtain one from the third service four months after that. By ordering in intervals, you’ll likely have a better chance of discovering the presence of any unauthorized accounts or other credit issues during the course of the year.
To find out more about how divorce can affect your credit, consider consulting with a knowledgeable divorce lawyer in your area.