It is important for divorcing couples to understand early on that if they have joint debt, their credit ratings are inextricably linked until they separate their obligations. Therefore it is in their mutual self-interest to make payments on time. A bad credit score makes it difficult for both parties to move on. The time to act is before there has been a missed payment. Divorce is stressful and can sometimes lead to erratic financial behavior on the part of a spouse. It is therefore advisable for divorcing persons to take control of payments that affect their credit rating as soon as possible.
Remember, court orders aren't magic
Most divorcing couples believe that a divorce decree can relieve a spouse of a joint financial obligation. Not true! Court orders and divorce decrees can't save divorcing couples from financial peril if one or both spouses act irresponsibly. "People have a naive expectation toward court orders, like they're magic," says Barbara Stark, divorce lawyer and principal of Divorce Resolutions Resources. "But court orders are not magic. People have to learn to take responsibility for their own finances and their own lives. The sooner they learn this, the more quickly they'll be able to limit the damage [to their credit rating]."
Court orders can't do much to protect a divorcing couple's credit rating. This is because when a married couple signs a joint loan application, both spouses make a legal agreement with the creditor to pay back the debt. A court cannot overturn this contract (unless it is unlawful for some other reason). An amendment to any contract requires the agreement of all parties, including the creditor. The only way to get your name off the mortgage note is to pay it off or refinance.
Why credit bureaus will disregard your divorce decree
Credit scores matter because they measure for businesses what sort of a credit risk you are. They are "the driving force" in determining how much you will pay for a loan. The higher your risk (i.e., the lower your score), the more money you will pay to borrow — whether for a mortgage, auto loan, or credit card.
The most widely recognized credit score is FICO, computed by Fair Isaac & Co. In the U.S., your FICO score is based on financial information tracked by three major credit bureaus: Equifax, Experion, and Trans Union. (For a free credit report from these agencies, go to www.annualcreditreport.com). In Canada, the three major credit bureaus are Equifax Canada, NCB Inc. and TransUnion Canada. (Visit www.canadian-creditreport.com for a free credit report.)
FICO takes into account a lot of different credit information in determining your score; more than half of the calculation comes from your payment history and the amounts you owe. So if your mortgage payment or other loan is past due because your spouse has failed to make a court-ordered payment, this will still have a direct impact on your FICO score.
How to protect your all-important credit score during divorce
Regardless of what your divorce decree says or what's fair, if you have a joint debt, you're responsible for it. So it's important to take the following steps to protect your score:
- Identify all joint accounts. A good way to do this is to get your credit report from each major credit bureau: Experian Trans Union, and Equifax. These reports will show open department store credit cards that you might not have used in years. If you're not sure whether your spouse is authorized to use a particular card, check with the creditor directly.
- If possible, close all joint accounts immediately. This is easy to do if there is no outstanding debt. If, however, you owe something on the account and can't close it, freeze it so that no one can continue to use it. Then transfer the joint debt from joint name to sole name. This has to be done equitably.
- Make sure to make at least the minimum payments on joint credit card bills while you are in the process of closing/freezing joint accounts. Even one late payment can affect your FICO score.
- If you don't have a credit card in your own name, now is the time to get one. Building your own credit history takes time, so it's best to get started.
- In the case of a joint mortgage (secured debt), your best options are either to sell the marital home and pay off the mortgage, or refinance the mortgage in the sole name of the person responsible for paying it. If you decide to refinance, make sure to do so before the divorce is final. Sometimes one spouse won't qualify for refinancing on his/her own; it's best to know this upfront.
- While you're waiting either to sell your home or refinance it, make sure your mortgage payments are current — even if it is your spouse's responsibility and you have to borrow from friends/family to do so. Remember that missed payments affect your credit rating, too.
- Make sure not to take your name off the title if your name is still on the loan. This will only remove your name from ownership — not from your obligation to pay off the debt.