During a divorce people rarely consider the impact on their credit,
yet the ramifications of a failure to properly prepare can be devastating. To
understand what to do, you must determine the status of each of your accounts
and develop a strategy to protect your future.
If you have an individual account:
If you apply for an individual account, only your individual income, assets and
credit profile are considered by a creditor. Whether you are married or single,
you alone are responsible for paying off the debt. The account will appear on
your credit report alone, unless you have
designated another person as an "authorized" user. In which case, it
may also appear on his, or her, credit report.
Individual accounts in community property states:
If you live in a community property state such as Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, you and your
spouse may bear responsibility for all debts incurred during the marriage. And,
the individual debts and payment history of one spouse may appear on the credit
report of the other.
The pros and cons of individual accounts:
If you do not have a job, work part–time, or have a low paying job, your credit
profile may not support an extension of credit without including your spouse’s
income. However, if you can obtain an account in your own name and demonstrate
a responsible payment pattern, no one can adversely affect your credit profile
as to that account.
Authorized users:
If you have an individual account, you can authorize your spouse as an
additional user. If you opened your account after June 1, 1977, and have
authorized your spouse to use your card, a creditor who reports the payment
history to a bureau must report it in your spouse’s name as well as yours.
Pros and cons of authorizing a spouse to use your account:
Oftentimes user accounts are a convenience, or a means of helping someone have
access to credit which otherwise would be beyond their reach were they to apply
for credit as an individual. Unfortunately, when someone is simply an
authorized user on your individual account, you alone are responsible for the
debts they may incur.
Joint Accounts
When applying for a joint account, the income, financial assets and credit
history of both you and your spouse will be evaluated by a prospective creditor.
If the credit is granted, regardless of which spouse handles the monthly bills,
each is responsible for the payments. If a joint account was opened after June
1, 1977, any creditor reporting the credit history of a joint account must report
the payment history in both names.
The pros and cons of joint accounts:
If you and your spouse apply for credit together this can help both in the event
that each has a solid credit history, but insufficient income as an individual.
Or, it will help the spouse with a weaker credit profile qualify for credit that
would have been beyond his, or her, reach in the event he, or she, had applied
alone. However, joint accounts obligate each spouse to pay off the debt.
Therefore, your former spouse could run up bills on a joint account, fail to
make payments and ruin your credit.
What are your obligations with a joint account after a divorce?
Because both spouses applied for the account jointly, even if a divorce decree
assigns separate debt obligations to each spouse, both spouses are responsible
for the debt and both will receive negative marks on their respective credit
reports if payments are late, or missed. Therefore, it is important for both
spouses to ensure that payments are always made on time even after the divorce.
How can you reduce your exposure?
Individual accounts:
If your spouse was an authorized user on your individual account, request that
the creditor remove his, or her, name.
Joint accounts:
You should either close joint accounts, or request that the creditor convert
these accounts to individual accounts.
Under the law, a creditor is prohibited from closing a joint account because of
a divorce, but is permitted to do so if either spouse requests it. However, a
creditor is not required to change joint accounts to individual accounts. The
creditor can require you to reapply for credit as an individual. Based upon the
strength, or weakness, of your credit profile, they can either grant or deny
credit.
Mortgages or Home Equity Loans
Where mortgages or home
equity loans are involved, in most cases creditors require a refinancing to
remove a spouse from the obligation.
