The finances of divorce, like everything else associated with the unhappy institution, can be tricky, complex and heart-breaking. Untangling joint accounts and obligations is essential in order to move on and become independent again. But what kind of impact, if any, does divorce have on your credit score?
A mortgage by any other name
A consumer recently asked financial expert Lynnette Khalfani-Cox if her credit score would be affected by her impending divorce. She owns a house jointly with her spouse, and it’s currently in foreclosure. She asked if she could skirt that ding on her credit report by reverting to her maiden name.
“Filing for divorce, in and of itself, will neither help nor hurt your credit score. Neither will going back to your maiden name. Lenders and creditors will still evaluate your credit history primarily based on your payment track record. And regardless of your name, banks and other credit grantors will certainly be able to tie your current name to your old name because your identity is linked through one all-important thing: your social security number.”
Divorce doesn’t hurt credit score itself
Experian concurred that divorce itself does not impact a credit score. However, the credit reporting bureau was quick to point out that it doesn’t absolve any debt, either. And any debt ignored can put a ding in a credit rating.
“Divorce proceedings don’t affect your credit report or credit scores directly. Rather, the financial issues that are embroiled in the divorce process often involve joint credit accounts, and those very much affect your credit history and credit scores.”
Divorce doesn’t absolve debts
Divorce decrees often specify which party is responsible for which accounts. That does not, however, alter the agreement with the lender. If both parties are listed on the account and the designated party goes into default, the other ex-spouse could be held responsible, even years after the marriage has dissolved.
Joint accounts also leave the door open for vindictive spouses to make large purchases that will soon become the responsibility of their soon-to-be-former spouse. However, the act is short-sighted, as it could destroy the credit ratings of both parties.
Things to do to avoid problems
All joint accounts need to be either closed or turned into individual accounts. And, as discussed above, if possible, do so before filing for divorce to prevent a vindictive spouse from running up charges.
Make joint accounts into individual ones
Consider turning joint credit cards or other lines of credit that can’t be closed into individual accounts. Decide who will be responsible for which accounts, and call creditors to have one of the names removed.
Pay off creditors
Some accounts may be close enough that it makes sense just to pay them off and close them out before the divorce. Sometimes the creditor will allow customers to pay off with a lesser amount than is owed, so don’t be afraid to ask.
If both parties can’t reach an amicable agreement about an account, consider freezing it. That will disallow access to it, but the balance owed will be designated to one party or the other in court. The other ex-spouse will then not have to worry about a credit ding.
Finally, all creditors should be alerted to the divorce and be informed of any address or name changes.