Although the credit bureaus do not consider divorce one of the many factors that contribute to an individual’s creditworthiness, expecting to come through a divorce with your credit unscathed simply isn’t realistic. Your individual financial behavior, the types of debt you and your spouse carry and the amount of joint debt you both owe affects your credit scores long after the divorce is final.
Closing Joint Accounts
It isn’t uncommon for married couples to hold joint accounts. One of the first financial decisions most divorcing couples must make is whether or not to close their joint accounts. While closing a joint bank account doesn’t have a clear credit impact, closing a joint credit card often damages both individuals’ credit scores.
Your credit utilization ratio–the percentage of debt you carry on a credit card as measured against that card’s credit limit–has a significant effect on your credit rating. When you close a joint credit card, you lose the available credit remaining on that card. This increases your credit utilization ratio and, in turn, adversely affects both your credit scores and those of your spouse.
Misunderstanding Payment Responsibility
In a divorce, you can either negotiate with your spouse to determine which of you is responsible for certain debts or let the court decide. The distribution of debt becomes final when the court issues a divorce decree. Regardless of what your divorce decree states, creditors can and will continue to hold both of you liable for payment. Creditors are not legally required to adhere to the terms of a debtor’s divorce decree. Should your former spouse fail to make timely payments on a joint debt, that account’s creditor has the right to pursue you for payment–even if the court allocated that particular debt to your spouse in the divorce.
Unfortunately, by the time the creditor contacts you, your former spouse may be significantly behind on the payments. Those missed payments will appear on your credit reports and cause considerable damage. A single missed payment can result in a loss of 100 points or more from your credit scores and remain on all three of your credit reports for up to seven years.
Malicious Credit Damage
Nothing brings out the worst in people quite like divorce, and it isn’t uncommon for former spouses to punish each other in any way possible–including financially. Financial maliciousness can decimate your credit rating. Malicious behavior includes, but is not limited to:
. Charging large amounts to joint credit accounts
. Adding a spouse to a credit card account as an authorized user with the intent to mismanage the account and cause credit damage
. Intentionally missing payments or defaulting on joint debts
. Purposely incurring new marital debt prior to the divorce
You can’t prevent your spouse from engaging in malicious financial behavior during a divorce, but you can remind him or her that such behavior ultimately hurts both of you.
Minimizing Credit Damage During a Divorce
Communication and compromise are the best ways to minimize credit damage during a divorce. If both you and your spouse evaluate your finances, reduce expenses and allocate debt as fairly as possible, you can both keep your credit scores stable throughout the divorce process and beyond. In acrimonious situations, however, it is often best to pay off as much joint debt as possible before separating. The less marital debt that can come back to haunt you, the better your credit rating will be after your divorce is final. Call the Law Offices of Peter Van Aulen today at (201) 845-7400 for a free consultation in regard to divorce.