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How Divorce Can Impact Credit

If you are headed for divorce, you may be concerned about the divorce damaging your credit score. This is a reasonable concern, but it is not an inevitable consequence of divorce. There are steps you can take before, during and after your divorce to protect your FICO score.

First, it’s important to understand that divorce itself does not damage one’s credit. Unlike a bankruptcy, a late payment, a charge off, a judgement, or a lien, divorce is not automatically reported to the three major credit bureaus: Experian, Equifax and TransUnion. So, the divorce is not the issue, it’s other factors that may occur during or as a result of the divorce.

Joint Accounts Are the Concern

Joint credit card accounts and co-signed loans can cause trouble for divorcing spouses. While marital debt is sorted out through the divorce settlement, it’s not difficult for joint accounts and co-signed loans to “slip through the cracks.” Sometimes, such an account is ignored or forgotten about until it’s too late and the damage is already done.

If you have a good amount of credit card debt or co-signed loans (for example, an auto loan or a mortgage), you must pay close attention to these accounts before, during and after the divorce. If a joint account is not closed or switched into one spouse’s name alone, both spouses may be on the hook for the debt, even after the divorce. Creditors are often not concerned with provisions in divorce decrees.

Suppose in the divorce agreement, your spouse agrees to pay the $10,000 balance on a credit card account with both of your names on it. As long as your name is on the credit card account, you are likely still legally liable for the debt. If your spouse fails to pay on the credit card for any reason, it will be reported on your credit and this can lead to a dip in your credit score. Any such late payments, collections or charge offs will likely be reported on your credit as long as your name remains on the credit card account. The same applies to any co-signed loans, such as auto loans, mortgages and home equity lines of credit.

Preventing Credit Mishaps

Ideally, you’ll be able to pay off all joint credit card accounts and close them before the divorce is complete. If not, the second-best solution is to remove your name from any credit card accounts that are going to be your spouse’s responsibility. As far as mortgages and auto loans, we often recommend refinancing these loans so they are in one spouse’s name once the divorce is final. Essentially, in most instances you want to cut off all financial ties with your husband or wife, if possible. By doing so, you maintain the most control over your credit score.

For divorce representation in Cypress and Katy, contact Hunt Law Firm, PLLC.