CREDIT & DEBT
Managing Credit After a Divorce
By Marcia Lerner
A divorce is the start of a new life, and if you've gone through a split, you're no doubt looking ahead, not back. But in one crucial financial area — your credit health — you'll need to do both, separating yourself from your former spouse while putting your new, independent finances on solid footing.
Just getting through the divorce itself can be a major financial hurdle, and your household income is likely to be lower than it was, while you may now have to cover mortgage payments and other expenses on your own.
For Ann L., a social worker in Boston, divorce also brought unwelcome surprises involving her credit history. She says her ex-husband had controlled the couple's finances, and when she checked their credit report she discovered problems, including a missed mortgage payment, that she hadn't known about and that affected her post-divorce credit score.
Credit concerns in the wake of a divorce are often temporary. “Your credit score is a picture of your credit risk at a particular moment in time," says Pam Codispoti, president of Chase Consumer Branded Cards. “As you improve good credit behavior and make those behaviors consistent, past poor credit behaviors fade and weigh less heavily on your score."
Here are some tips that may help you make that happen.
See where you are
Your credit score is a numerical rating of your creditworthiness based on your credit history, which is tracked by the three major credit bureaus — Equifax, Experian, and TransUnion — and consulted by lenders. They look at how much debt you carry, whether you make payments on time, how long you've had credit, what types of loans you have and how much of your credit is new. Your score is essential for getting new loans and renting or buying a home, and potential employers may check your credit report, though not your score.
"To find out where you stand, first take a close look at your credit report."
Katie Kiihnl, attorney
Trouble is, after a divorce, your credit score may have more to do with your former spouse than with your own credit history. Your creditworthiness has likely also been entangled with that of your former spouse.
“To find out where you stand, first take a close look at your credit report," says Katie Kiihnl, an attorney at Boyd Collar Nolen & Tuggle, a family law firm in Atlanta. Check your own personal debt and other loans you had with your former spouse that may be in your name.
As you examine your report, says Andrew Samalin, president of the Association of Divorce Financial Planners, keep an eye out for unfamiliar entries, and look for loans that you've cosigned with your ex. Your lawyer can help you make sure your divorce agreement addresses all of your debts.
Separate your finances
Contact banks and credit card companies to close joint accounts and confirm which spouse needs to pay which loan. If a joint account has a debt you can't immediately resolve, make arrangements to prevent further spending. Be sure to consider future obligations too, Samalin says, including student loans yet to come due or a mortgage interest rate scheduled to increase. Above all, try to reduce or eliminate the debt from your old financial life. Keep in mind that this could take some time.
Make your own credit history
If your credit history during your marriage was largely in your ex-spouse's name, start by opening a credit card account in your name, and pay the balance consistently and on time. And make the most of your post-divorce assets, advises Kiihnl. For instance, should you end up with the family house, carefully document your new financial situation, including income and the divorce judgment, as it may help you qualify for a new mortgage in your name.
Stay on top of your finances
“If you don't take care of your credit at the beginning of your separate financial life," says Josh Palmer, CFP®, head of the wealth advisory team for Chase Wealth Management, “fixing it later is a lot harder." Try to revise your budget and expectations to fit your new income. And while it may be tempting to use credit cards to fill budget gaps in your new single-income household, Palmer warns that if you get too close to the credit limits for your cards, your credit score may drop. (Visit Chase Slate to find out about other ways to manage your credit health.)
Think long term
Establishing yourself financially can take time, and during that process your credit score and other aspects of your financial life may not be exactly what you'd like them to be. But you can change that.
Now, five years post-divorce, after working through the problems she inherited from her former spouse, Ann L. has excellent credit in her own right. After a divorce, with a new financial plan, there's no telling where you can go. As Samalin says, “This could be a great new start."