MICHELLE PERRY HIGGINS: In all the turmoil that goes along with the divorce, one thing both spouses need to keep in mind is that divorce has the potential to affect their individual credit scores–and not in a good way.
Married couples very often have intertwined financial lives. Both spouses may have signed the mortgage on their home or the loan on a car. They may have joint credit cards or be an authorized user on the other spouse’s credit cards. Their joint obligations may extend beyond debts entered into by both of them knowingly. For instance, in community-property states, debts incurred by one spouse in their own name, only during the marriage, may be considered legally the obligation of both if the debt benefits the marital community.
Generally, a divorce decree from the court will specify which party is to be responsible for particular debts incurred during the marriage. So what is the problem? The problem is that the parties that extended the credit in the first place are not parties to the divorce.
So, if there are shared accounts or debt that is considered to be joint, as in the community-property states, nonpayment on these accounts during and after the divorce may affect the credit standing of both spouses, not just the spouse responsible under the divorce decree. In the eyes of a credit-card issuer, for example, both parties are ultimately on the hook for the debt and it doesn’t matter who is supposed to be responsible. If the spouse who is bound by the divorce decree to pay the debt fails to do so, the failure to make payment on the joint account will appear on the credit reports of both spouses. Payment history is the largest factor in calculating credit scores, so the hit could be significant.
How can divorcing spouses avoid such credit dings? Ideally, the spouses will agree to pay off and close joint accounts or convert them to an individual account where possible. However, if this approach is not possible–either for practical reasons or because one or both spouses are not interested in cooperating–a second line of defense is to set up online access to the account so that the spouse who is not responsible for the account can review payment status.
If a payment is not made on time, the spouse can contact the other spouse to remind them to pay or to find why the payment is late. If the responsible spouse is unable or unwilling to pay, the other spouse has a difficult decision. They can make the payment even though it is technically not their responsibility under the decree, or they can refuse and both spouses will take the hit to their credit score.
If the spouse who is not responsible decides to make the payment, they may have recourse against the responsible spouse based on the divorce decree.
Source: Wall Street Journal September 13, 2015 Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.