It's often occurred to me that people who have had children together can't really split up completely -- at least, not until the children are grown, and perhaps not even then. They'll always be in each others' lives in some way.
That's not unlike what happens when couples who have shared credit together split up. When you marry, odds are you'll open some joint financial accounts and borrow money together. When you divorce, you settle your affairs legally, and everything might feel finished. But if you were once yoked together in debt, the relationship is far from over. You may be the model money manager, paying every bill early, but if your ex is making late payments or missing payments altogether, your credit rating might plunge. Even worse, creditors might come after you to cover your former spouse's debt. Sure, you can go ahead and argue against it, but it could be a time-consuming and financially costly endeavor.
This can even happen to folks who never married, such as friends who bought a house together or someone who helped a family member by co-signing on a loan application. In a Smart Money article, John Ulzheimer, president of Credit.com Educational Services, explained, "The divorce decree doesn't override the original contract with the creditor.... They'll go after both parties with equal vigor, just as if they weren't divorced."
Another problem is that some people, even after a divorce, will apply for loans using their ex as a co-signer. And sometimes, if you have similar names and similar histories, as former spouses often do, information can get applied to the wrong person's records. A friend of mine has a brother with a similar name (think Robert Jones and Roberta Jones). His not-so-hot credit record has gotten mingled with her own better record, due to similar names and addresses, and even perhaps similar Social Security numbers.
What to do
The first thing you might want to do, if you fear you might be in danger of being affected by someone else's credit behavior, is to gather copies of your credit reports and credit scores. (You can learn how in our Credit Center.) You'll be able to see how healthy your credit score is, and whether there are any mistakes to correct on your records. For example, you might find that your current or past addresses include those of your ex -- places where you never lived.
Many errors you find can be corrected, raising your credit score. In Smart Money, Aleksandra Todorova also recommends:
Pay off all debts, as much as possible, and only after taking into account tax implications.
Refinance all joint debts, "closing all joint credit cards and transferring the balance to a new card in your name, for example, and refinancing the mortgage or auto loan." With some property, it might be best to sell it and split the proceeds.
Continue monitoring your credit reports and debt statements.
I'll add a note here that once your debts are paid off, at least your high-interest ones, you should consider moving money into the stock market. Its returns will get compound interest working in your favor.
Fools chime in
On our Credit Cards and Consumer Debt discussion board, Fool Community members discussed divorce and credit a while back. (You can read the whole discussion here.) Below are a few snippets:
Joelcorley offered his experience:
Thankfully, I separated my finances from my ex-spouse shortly after I realized she had a serious problem with money. We finally divorced nearly a decade later -- about 29 months ago. Even so, I still have occasional problems with bill collectors trying to collect money from me that she owes. ... Anyway, if you're recently divorced or considering divorce I highly recommend you consider all possible options to separate your finances.
Having similar attitudes toward money can make for much smoother relationships. Electrasmom noted:
We do own the house and 'my' car together but everything else is in our own names. Separate checking, savings, [credit cards], etc. And everyone thinks we are nuts. We are going on nine years of marriage now and still don't see the problem. Maybe it helps that we have the same mindset about money.
2gifts offered another point of view:
In my case, we've had joint finances since Day 1, and as we're going on 24 years of marriage, even if we divorced tomorrow, I don't think I'd think how we had handled our finances was a mistake ... I do realize that's not the case for everyone, but just because something does or doesn't work for one couple does not mean it will be the same for another couple.
Xtn explained how he and his wife handle their finances:
My wife and I do not have any joint accounts accept for one money-market account. We each have our own credit cards... We saw it as a way to safeguard a credit rating. In case we were ever faced with a situation wherein we cannot pay some debts, we can at least keep one of our credit ratings clean. We also avoid the whole mess of trying to keep a running balance in a checkbook register when both parties are writing checks from the same account.
Our Credit Center can help inform you about how the world of credit cards works, show you how to check your credit report, and many other useful things.
And I'll sum up with Joelcorley's last words in one of his posts: "Hope for the best -- but plan for the worst."
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