Confucius say: Beware scorned spouse with shared credit.
Maybe the Chinese thinker and philosopher didn't actually say those lines, but he should have. Your credit sits on dangerous ground when you and your spouse decide to split up.
People do unpredictable things during emotional times, and its best not to leave yourself open to sabotage; whether it be intentional or accidental. Bad credit can hurt your chances of getting good terms on credit cards, mortgages, and auto loans. And at a time when you are trying to re-establish your own financial identity, you shouldn’t risk also being potentially penalized by landlords, utility and insurance companies, who use credit scores to establish security deposit and premiums.
Here are five ways to protect your credit during a divorce:
1. Create a post-divorce budget
Don't take on more obligations than you can handle in the divorce agreement, or your credit could suffer. Remember: You're moving from a dual-income household to a single-income budget. It is imperative you make the right choices now before getting in over your head.
Housing costs should take top consideration in your new budget. Those include the mortgage payment, along with property taxes, insurance and maintenance, or rent -- and don't forget the security deposit and renters insurance. Utilities and phone also fall under this category.
Then factor in other obligations: credit cards, auto payments, personal loans and any other insurance costs. If you find that you're close to your limit, consider what can be cut: cable, a premium cellphone plan or other luxuries.
2. Take stock of your debts and credit lines
If you've been married for a couple of decades, you've probably forgotten about all the accounts you share with your spouse, such as an unused home equity line of credit or a Sears credit card you opened seven Christmases ago.
Start by pulling your credit report to see the accounts you have. Note the ones listed as individual, joint or authorized-user accounts, as well as the payments and the balances on each.
An individual account in your name means you're solely responsible for the debt, unless you live in a community property state. In community property states, such as Texas and Arizona, any debts acquired during the marriage and within those states are considered jointly owned. A joint account means you and your spouse share responsibility for paying off any debt on that account. An authorized user means the account is held individually by one person who allows another to use the card without being responsible for the balance.
Not every lender or creditor reports to the credit bureaus, so you still may miss some accounts. Be diligent in your search for all accounts you may share.
3. Remove each other as authorized users
Check your credit report and note every credit card that lists your spouse as an authorized user, which means your spouse is not responsible for repaying any debts incurred but is able to charge on the account. It's easy to remove an authorized user from your credit card. Simply call the credit card issuer and ask that your spouse's name be removed.
It's just as important that you get removed as an authorized user from your spouse's credit card accounts, because they can still be included on your credit report as well as factored into your credit score.
You should be able to contact the credit card issuer yourself and have your name removed if your spouse refuses to do it. If the credit card issuer doesn't allow it, contact the credit-reporting bureaus and dispute the inclusion of the account on your credit report.
4. Untangle joint accounts if possible
The task of separating joint accounts where both spouses are responsible is more complicated.
Many people don't understand that a divorce decree doesn't change the contract you have with your lender. The only way to remove yourself (from a joint account) is going through the lender.
Pay off any joint accounts and close them before proceeding with the divorce. If that's not possible, try to turn joint accounts into individual ones. For example, transfer the balance from one credit card to another that is in one spouse's name only, and close the joint account. Or try to refinance the mortgage in just one spouse's name.
If you can't split the accounts, divide the responsibilities of the joint debt. The person who lives in the house takes on the mortgage. The spouse who gets the car gets the auto loan, too. Spell out the arrangements in the divorce agreement. Include what-if scenarios to protect yourself. For instance, if your spouse is going to miss a payment on joint debt, he or she must notify you in advance, so you can make the payment and avoid denting your credit.
5. Keep tabs on joint accounts
Ask your lender to send you a copy of all joint account statements each month, even if your spouse is responsible for making payments on the account. Some may do it automatically, while others may allow access to account records online.
In addition, pull your free credit report from a different credit-reporting bureau every four months to make sure all accounts are being paid on time. Under federal law, you're entitled to request a free credit report from each of the three major credit-reporting bureaus every 12 months, through AnnualCreditReport.com.
If your spouse isn't making the agreed-upon payments on the joint accounts, contact your divorce attorney right away. The court will likely make your spouse pay any legal fees if the creditor comes after you, along with reimbursement of any other out-of-pocket expenses, however the damage to your credit may already be done. The best advice is to make the preventative measures in advance of your final divorce in order to protect your financial standing.