What could be worse than going through a divorce? How about a seven-year reminder of what a financial wreck your ex was?
That's right: You two may have called it splitsville years ago, but the credit reporting world isn't as quick to call it quits. Sprinkled throughout your intertwined credit files are reminders of your financial union gone awry: Your first new car loan! Your first bounced check. Three months in Tibet! Three months of ignored bills.
You may think that those credit blunders are history, but unless you separated your debts the right way, your ex-spouse (or, rather, your ex's finances) may still be dragging your name through the mud.
You can point fingers all you want, but your creditor doesn't care who is to blame for late payments, settlement claims, and other affronts that were committed. It just wants to get paid. If both of your names are on an account, each of you is fair game. State laws vary, but in most places you are responsible only for debts that were incurred during marriage. (There are exceptions, such as debt for family medical necessities or education for a child during divorce.) So thankfully you won't get stuck shouldering his private grade school student debt or her premarital bank loan. However, joint accounts, or accounts where the creditor factored in each spouse's ability to pay, are considered both of your problem.
Till debt do you part
All that togetherness may have seemed sweet when you were newlyweds giggling about your matching credit cards and first mortgage. In hindsight you probably should have struck out on your own -- financially -- once in a while. Your ex's disheveled way with money isn't nearly as endearing when it's the reason you're turned down for a lowly gas card. three years after your divorce was finalized.
You might be able to overlook that minor inconvenience, but what about when you can't qualify for a decent home refinancing rate? Or when your car insurance costs skyrocket -- or your policy is dropped altogether -- because of questionable entries in your credit file? Thankfully it's easy -- and pretty cheap -- to see whether your ex's money habits are sullying your good name by checking your credit report online. Check your file with all three major reporting credit agencies to be safe. (I like TransUnion's three-report format offered by its consumer arm, TrueCredit, a Fool advertiser, but you should compare sample reports at other sites and pick the one that makes the most sense to you.)
It turns out that lines of credit are the ties that really bind two people together. And these days it's more important than ever to fully separate what's his and hers. Your credit score is being used as a measure of your reliability by many entities -- not just banks. Employers, landlords, utility companies, and insurers regularly consult credit files to set rates and determine whether to even do business with you. (You can see who is snooping on your credit report. It includes a list of any entity that has made an inquiry into your credit record.)
It is relatively easy to part ways, creditwise. NoLo Press's no-frills Divorce & Money lays out three options for allocating marital debt:
- Sell your joint property together, and use the cash to pay off marital debts.
- You (or your spouse) agree to pay the majority of the debt in exchange for a greater share of something else, such as marital property, an increase in alimony, or the dog.
- Divide joint property and debts equally and each agree to pay half of the debts, air kiss, and call it a day.
The last option leaves open a lot of loopholes, particularly if your amicable relationship take a less cordial turn over time. A clean break is probably the best way to separate conjoined finances.
Become a card-carrying single
If you are still bound to an ex by a banking relationship, contact the creditor to close your joint accounts (a divorce decree divvying up the bills doesn't count), and reopen or open another account elsewhere in your name only. Don't forget retail charge cards, gas cards, and that $38.53 in your joint "Christmas account" at the bank.
Even if you, personally, never touched a line of credit taken out in both of your names, you can legally be held responsible for its payment. Plus, how the account is handled will continue to be reported on each of your credit reports. If your former spouse is an authorized user on an account (or vice versa), simply have his or her name removed. Just being an authorized user does not make someone responsible for the payments.
If your entire credit history is tied to your ex, you may find it difficult to qualify for credit on your own merit. Stay strong and be patient. Start with your bank and see whether it has a credit card for which you qualify. If that option doesn't work, get a secured credit card. It works like a prepaid Visa or Mastercard where you pay a security deposit, which serves as collateral for your purchases. After three to six months of regular use and on-time payments, you should be able to qualify for a regular credit card.
When the better offers appear (there are plenty of awful offers; you're looking for "the one"), do not close the secured card until you are officially approved for the new account. Although length of credit history is important, in this case getting rid of a card with an annual fee and low credit limit will serve you better.
How will all this jockeying affect your credit score (or "FICO score," as it is commonly called)? Even if everything goes smoothly, you may see a short-term downward spiral when you close and reopen accounts. The amount of new credit you apply for and the length of your credit history together make up 25% of your overall score. (Payment history accounts for 25% of your overall score, amounts owed affect 30% of it, and types of credit count for 10%.) Sacrificing a few points today is preferable to letting a former partner have a continued say on your credit report card.
Even if reminders of your ex haunt your credit file for some time -- perhaps even longer than your official union -- take heed: Happy memories and positive credit notations linger longer in your banker's mind than any credit misdeeds.
To Dayana Yochim's mother's ongoing disappointment, she has no one but herself to blame for any credit maladies. She is the author of Couples & Cash: How to Handle Money With Your Honey and committed to The Motley Fool's disclosure policy.