Written by Kimberly R. Nelson, C.F.A., C.D.F.A.
Divorce can be an emotional roller coaster that you never wanted to ride in the first place, and you just can’t wait to get off of. While you’re holding on tight and waiting for this shaky ride to end, it’s easy to forget about basic money management and how important it will soon become, particularly when it comes to your personal credit. If you don’t protect yourself, you risk the negative consequences associated with your former spouse’s debt.
Here are 4 proven tactics to help you protect your personal credit and avoid being tied to your former spouse’s debt:
- Close it. Get rid of entangled credit and credit cards.
- Freeze it. Put your credit on ice.
- Separate it. Create a line of credit just for you.
- Monitor it. Check your credit regularly to stay on top of it.
1. Close it.
As you begin to work toward detangling the financial web that you and your spouse have woven over the years, a good first step toward financial independence is to close any joint lines of credit, joint credit cards, and even joint checking accounts.
This is important because you don’t want to be on the hook for any new debt that your soon-to-be ex might incur during your separation, and you will need a strong credit score as you transition into your new single life with a new apartment, home loan, etc.
The best course of action to protect the credit of both parties is to decouple any credit card accounts during the separation process. If things are still amicable between you two, communicate with your ex about how you might pay off the cards together and close the account as soon as possible. You may also consider transferring the debt on any joint cards to new individual credit cards in each spouse’s separate name and closing the original account.
If you and your soon-to-be ex are not on amicable terms, you should stop using any joint credit accounts yourself and let your attorney know that the debts incurred on the joint line from that point forward belong to your ex, and try to work that into the final divorce settlement.
Remember that no divorce decree trumps the contract you have with the issuer. This means that even if your divorce settlement states that your spouse must pay the debt on a joint credit card, your credit is still at risk if they choose not to pay.
2. Freeze it.
Even if it seems unlikely, your spouse might be able to open new lines of joint credit without your authorization. But there is a way to protect yourself! These days you can put your credit “on ice,” meaning you can lock it up with each of the three credit bureaus (Experian, Equifax, and Transunion) so that no one (including you) can create a new debt channel until you call the credit bureau and “unfreeze” it yourself with your own secure password.
A bank is likely to require a credit check to simply open a bank account, so even a new checking account cannot be opened in your name while your credit is frozen. That said, creditors and lenders with whom you already have accounts may have less stringent requirements to open a new account, so check in directly with them to be certain your credit is protected.
Placing this freeze on your credit does not affect your credit score, and while there is usually a small fee to put the freeze in place, it costs nothing to unlock it once you are ready.
3. Separate it.
Even if you have been married for a long time, the credit bureaus maintain separate files and credit ratings on you and your spouse. That’s why creating separate lines of credit now is vital.
At this time, you do not want to incur any further joint debt, and, as noted in tactic #1 above, no divorce decree will negate your original contract with the lender. If your ex continues to tap that credit line, it could potentially leave you on the hook for more debt than you realized. Furthermore, this is also the stage where it is critical to make sure that your spending is separate from that of your soon-to-be ex.
When you are ready to have your attorneys and possibly forensic accountants review both parties’ individual spending during a divorce negotiation, the ability to clearly define who spent what and why can be very powerful when ultimately separating assets and establishing MSOL (Marital Standard of Living), which is the basis for alimony and child support discussions.
Finding out that your ex-spouse has gone on an extravagant spending spree with joint assets is no fun, so take this opportunity to remove that possibility from your financial equation.
4. Monitor it.
Bad credit can cost you money in ways you never even imagined. This includes unfavorable interest rates when you take out a mortgage, car loan, or student loan. It can keep you from being able to rent an apartment, it can even prevent you from landing that great new employment opportunity you applied for.
That’s why it pays to know your credit score and to know that you are entitled to a free report by law every year from each of the three major bureaus. You can even check the same credit report from a different bureau every four months if you want to. Scan it carefully for abnormal activity, such as accounts or credit cards you did not open. You can order the report through each agency, or at annualcreditreport.com. They will offer additional services for a fee, but you really just need the credit score.
If you are worried about your credit as you move through your divorce, you can arrange credit monitoring for a nominal charge and receive email updates if there are ever any changes, applications for credit, missed payments on debt accounts, etc.
If there’s any good news about divorce and credit, it’s that the divorce itself has no effect on your credit score. Credit scores are affected negatively due to the actions (or inactions) of the parties involved. If you take the time to educate yourself about your personal credit, you will be that much closer to the resolution of your dissolution.
About the Author:
Kimberly Nelson is a Los Angeles-based wealth planner and investment advisor, empowering divorcees with the education and motivation to take control of their financial lives and build their wealth. You can find her here or by email at knelson@coastalbridgeadvisors.com.
Go to this page about online divorce to learn more.
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