Guide to handling credit during a divorce
Editor’s note: This story has been updated with the latest information.
Even the most amicable divorces are messy situations. You have to divide assets, hunt for a place to live and adjust to a budget on one income. If you have kids, you have to figure out custody and child-care arrangements. In the midst of all that, thinking about joint credit card accounts, splitting card debts and staying on top of your personal credit reports and scores may not be top of mind.
But how these things are handled in your divorce could have a lasting impact on your overall financial health and freedom long after the papers are signed and finalized.
Dividing credit card debt during a divorce
Debt during a divorce is handled differently depending on what state you live in.
In common law states (the majority of the U.S. falls into this category), you will be held responsible for any debts accrued solely in your name, while you'll be jointly liable for any debt that is under the names of both you and your ex-spouse.
On the other hand in community law states (there are nine, including Texas and California), you will be held jointly responsible for all debt accrued during the marriage — even if it's only in one spouse's name.
In your divorce settlement, the judge will issue a decree in line with these rules and any other agreements you and your ex-spouse come to. Among other things, your divorce decree states which party (you or your ex-spouse) is responsible for paying various debts. So if the court says your former spouse is responsible for paying a joint mortgage, that would be stated in the divorce decree.
But there's a catch — and it comes as a shock to many people. Although you and your spouse are both bound by the divorce decree, creditors generally aren't.
If you signed a joint contract with your former spouse for a loan or credit card, you're still responsible for the debt in the eyes of the lender, regardless of what your divorce decree says. If your ex-spouse is assigned responsibility for paying a joint mortgage in your divorce decree but he or she fails to pay on time, new late payments will almost certainly be added to both of your credit reports and both of your credit scores could suffer.
The scenario above happens all the time. It's one of the reasons why it's so important to pay off or refinance joint debt prior to the final divorce decree, if at all possible, as recommended by Experian. However, if your ex-spouse does not abide by the divorce degree and fails to make payments, he or she can be held responsible in court.
Protect your personal credit
Although it can be tough to come through a divorce with credit that's still in good shape, it is possible, especially if you and your ex-spouse can agree to work together.
Here are three steps you can take to protect your credit during a divorce:
Check your credit reports
It's always important to keep an eye on your credit reports from Equifax, TransUnion and Experian. However, it's especially important when you're going through a separation or divorce.
You can check your credit reports for free once every 12 months at AnnualCreditReport.com. (Note: Due to COVID-19, you can actually check your credit weekly, for free, through April 30, 2021.) After you've claimed your freebies, there are a number of websites where you can check your reports for free or sign up for a credit monitoring service to keep track of the three credit-check agencies for a fee.
If you want to be extra cautious, it's a good idea to check your three reports:
- Before you separate (or as soon as possible afterward)
- Once a month after separation
Be sure to save copies of your reports. If your ex-spouse opens or attempts to open credit in your name after separation, your credit reports can serve as proof of what happened. By checking your three reports frequently, you'll be able to react quickly if any problems arise.
Tip: If you're worried that your former spouse might try to open credit in your name during or after a divorce, a free credit freeze can help protect you.
Separate joint accounts
Separating joint accounts and dividing debt is probably one of the most difficult parts of a divorce — at least from a financial perspective. If you co-signed a loan or credit card with your spouse, you're both responsible for the debt in the eyes of the lender. That's true whether the account is a mortgage, an auto loan, a credit card or other financial obligation.
The best way to protect your credit during a divorce is to pay off and close joint accounts as quickly as possible. Here are a few ways to accomplish that goal:
- Sell the asset (e.g., the home or car) and use it to pay off the loan. If there's money left over, use it to pay off other joint debts.
- Refinance the loan into one person's name. Will your ex-spouse be keeping the house or vehicle? If so, it's best to refinance the loan in his or her name. If there's equity available in the home, you may be able to get your ex-spouse to agree to a cash-out refinance and use the available funds to pay off other joint debts, like auto loans or credit cards.
- Close joint credit cards. If you and your former spouse co-signed to open a joint credit card, it's typically best to close the account during a divorce. This goes against standard credit advice and, in truth, closing a joint card might have a negative impact on your credit score if it causes your credit utilization to increase. However, if you don't close the account, you risk legal liability for late payments and future charges made by your former spouse.
- Remove authorized-user status. Even if your former spouse isn't a joint account holder on any of your credit cards, he or she may have authorized-user status on your account. If that's the case, call your card issuer and remove the authorized-user status. Otherwise, as the primary cardholder you will be responsible for any future charges if your ex-spouse uses the account.
Build and maintain your own credit
Finally, make sure you have credit established in your own name. This is especially important if all of your previous accounts were joint or if you were only an authorized user on the credit cards.
Need to build credit in your name? A credit card can be a smart place to start. A properly managed credit card (no late payments, balance paid in full each month) has the potential to do great things for your credit score.
Paying for a divorce with your credit cards
Divorces are certainly not cheap. And TPG has received many questions over the years about whether it's smart to use a credit card to handle attorney fees. The answer to that always depends on two things: Does your attorney accept credit card payments with no additional fee, and will you pay off the bills in full?
If your attorney doesn't charge an additional processing fee for using a credit card to pay, then a large expense such as divorce costs can provide an opportunity to rack up rewards or hit a certain spending threshold on a card. However, even a 2% processing fee can wipe out the benefits of using a credit card altogether.
Another consideration is whether you end up accruing interest on a credit card. If you have the money to pay your bills in full immediately, then using a card to earn rewards can be a silver lining to the process. But if you would carry a balance on your cards from month to month, you'll end up having to pay even more money in interest costs over time.
If it does make sense for you to use a credit card, what card should you use? I'd recommend a flat-rate credit card such as the Capital One Venture Rewards Credit Card, which earns 2x miles on every purchase. You can then redeem those miles at a fixed value for eligible expenses or transfer them to a partner. The cost of a divorce attorney can also help you hit the current sign-up bonus available to new cardholders.
If cash back is more your style, you can also use the Citi® Double Cash Card, which earns 2% on every purchase (1% when you buy, 1% when you pay your bill).
Related: Best cards for large purchases
The bottom line
Protecting your credit during a divorce may seem like too much work at a time when you are feeling overwhelmed, but failing to do it can haunt you for years to come. Post-divorce, many people find themselves with low credit scores and damaged credit reports, and are unable to qualify for loans, credit cards or even an apartment. You can and should do everything in your power to avoid these problems.
Make the effort to protect your credit on the front end. It might not be fun, but you'll be grateful later.
Additional reporting by Michelle Black.