Although much has been said about the emotional and mental turmoil brought about by a divorce, there’s not a lot of information on just how damaging it can be to your finances. Sure, you’ll occasionally hear about the professional athlete or celebrity driven to bankruptcy because of ridiculously high spousal and child support payments. But things like debt, property division, and credit during a divorce don’t get the attention they deserve.
In truth, a divorce can have a significant impact on your credit score, which in turn, affects your ability to take on a loan, open a new line of credit, or refinance an existing loan. The good news is that there are ways to protect your credit during and after a divorce. Below are four steps to do just that.
Check Your Credit Report
Run a credit report during the divorce proceedings and double-check every credit card or loan item in your report. You might have a credit card under your name you’re unaware of with a balance owed that should be settled in the divorce process. Ideally, you want to close all joint accounts before finalizing the divorce to insulate your credit score from any spending activities.
Close Joint Accounts or Remove Your Name from Them
For loan accounts that can’t be closed right away, such as your mortgage or car loan, be sure you and your spouse agree on how to divide these debts.
When it comes to the family home, the cleanest thing to do is sell the property and use the proceeds to pay off what’s left of the mortgage. If your spouse insists on keeping the family home and shouldering all subsequent mortgage payments, remember that late payments will still affect your credit score.
The lender only cares about whose names are on the mortgage, regardless of their marital status. In other words, your liability for shared debt doesn’t go away after a divorce.
Apply for a Personal Credit Card Before Finalizing the Divorce
A credit card under your name can be a lifesaver for a spouse with no income after the divorce. To get circumvent the problem of having no income or not enough income to qualify for a credit card post-divorce, you can apply just before finalizing your separation. This way, you can leverage your spouse’s income to meet the credit card company’s requirements.
Evaluate Your Cash Flow Needs in the Future
High interest rates on credit cards will make it a challenge to pay off credit card debt with just one source of income after a divorce. It’s a good idea to consult a divorce financial planner to assess your cash flow needs and determine how much debt you can realistically keep. It may be in your best interest to sell off assets to pay your debt or create a settlement to pay off credit card debt.