Divorced Credit

When you're going through a divorce, you've got more on your mind than how it will affect your credit. However, this wrenching period can also devastate you financially. This article will help you avoid scars to your credit report and score.

Closing accounts

To avoid unpleasant surprises, sever your financial ties as soon as you can and get on with the business of establishing your new credit rating as a single person. Joint accounts, where both share responsibility, typically cause the most problems. These need to be closed, or converted to individual accounts, immediately. Start with your bank accounts:

Open individual bank accounts - both checking and savings
Divide joint account cash assets
Close joint household bank accounts

If you can't agree on the division, you may need a separate escrow account that will hold funds pending your divorce settlement.

Close credit accounts

Next, request that your joint credit accounts be converted into individual accounts. By law, creditors must close joint accounts at the request of either spouse so your former mate can't hold your credit for ransom.

However, creditors are under no legal obligation to establish new individual accounts. Be prepared to let certain accounts close in order to protect yourself. If there's a lot of debt, it should be split / refinanced onto individual credit cards.

Dealing with loans

Mortgages and car loans also must be separated. These are typically more complicated. If you're moving out and your spouse is keeping the house, it may be tempting to be nice and let your spouse just take over the mortgage payments. Be very leery of this plan. If your spouse defaults, you'll be on the hook for that loan. Seek to limit your exposure, not remain tethered to the other person. Usually that means one of these options:

Home

Refinance the home and have your spouse take out a new mortgage (if he or she can qualify)
Sell it to tap the equity

Car

Refinance so that the car is in the name of one or the other
Sell and split the proceeds (sometimes difficult if more is owed on the loan than the vehicle is worth)

Remember that as long as you are listed on accounts with your soon-to-be ex, you are liable for their financial behavior.

Maintaining good credit

Ideally, your good credit will be untouched after your divorce. It's up to you to ensure that happens. After separating your accounts, you'll be in charge of your finances and alimony, salary inequalities, child support woes can be a rude awakening. You may find your standard of living changes, at least in the short term. To maintain good credit or rebuild it, make sure you:

Pay all bills on time
Create and follow a realistic budget
Eliminate luxuries as you evaluate your lifestyle needs during your transition
Monitor your credit report and score

If you have no credit

Some people leave a marriage without ever having had accounts in their own name. Before your credit is separated from your spouse's, it's vital that you establish a credit line if you have never had one before. You will find it much easier to establish credit while you're still married.

Apply for a low interest credit card with no annual fee
Apply for a gas or store charge (easier to obtain)
Pay your credit bills promptly
After a few months, check your credit report to measure your progress

If your credit is poor, your transition after the divorce may be more difficult. After divorce, you'll probably have to rent an apartment or try to buy a home. You might have to purchase a car if yours is sold during the divorce. You will need credit to open new utility accounts and get insurance. Good credit will give you a cushion while you adjust, so start building it now.

Improving your credit

If your credit takes a hit during divorce, you're not alone. It is a very common result. To start rebuilding credit order a free copy of your 3 credit reports with scores. This will give you baseline information about where you stand. You want to have a credit score above 720 and no record of late payments.

Seek employment

People with jobs are the most attractive to lenders. Establish both solid employment and an unchanging residence for the first couple of years.

Prepare for emergencies

Make any necessary home or car repairs, doctor visits, etc. before your divorce. Do these things while there's money in the bank. Later you may be stretched too thin to take care of them. Emergencies can drain funds and potentially cause credit problems.

Monitor your credit

People have found out years later that their former spouse was still using their credit accounts! The only way to know for sure is to frequently check your credit report which lists all activity in your accounts.

Your Divorce Financial Checklist

Check your free credit report
Close all joint accounts; convert into individual accounts if possible
Open personal checking and savings accounts
Find a low interest, no fee credit card preferably with check writing privileges to help tide you over in an emergency
Agree on how you will handle outstanding mortgages, car loans, etc. and who, if anyone, will keep possession
Divvy up existing debt so there is no joint responsibility
Prior to divorce, take care of repairs and necessities out of the joint account
Follow up after divorce by monitoring your credit for changes and / or use by former spouse
During the divorce pay attention and pay bills on time so credit score is not affected negatively

Spread The Word:

In your financial life, few things figure as prominently as your credit report and credit score. Learning the basics of the credit report process, and keeping your credit report free of errors, is essential to good financial health. You should focus on improving your credit score as the highest credit scores receive the best interest rates and loan terms. On a mortgage, a difference of 100 points could be worth hundreds of dollars each month.

Since 2005, all Americans have the legal right to obtain a free annual copy of their credit report from TransUnion, Equifax and Experian credit reporting bureaus. This law is intended to help consumers reduce errors in their credit reports by minimizing the obstacles to viewing credit reports. To receive a free credit report visit the official site run by the bureaus: annualcreditreport.com

Your personal credit score is a number from 350-800 which stands for your credit risk. The higher numbers are considered less likely to default. Credit scores come from mathematical formulas that measure many variables in your credit report such as payment history, public records, and debt to income ratio.

The Fair and Accurate Credit Transaction Act (2003) amendment to the FCRA Fair Credit Reporting Act guaranteed all Americans the right to see their credit report once a year to check it for errors. To learn more about free credit, credit scores and financial terminology, visit our glossary page.