Personal Finance

How to Protect Your Credit During a Divorce

Your credit score may be the last thing on your mind during a divorce but keeping an eye on it will help you avoid stressful financial problems in the future.

Chanette Sparks, 35, of Raleigh, North Carolina, still struggles with the damage her divorce inflicted on her financial security—10 years after she and her husband legally ended their relationship. Before her divorce, Sparks' credit score was around 700. Today, it’s closer to 585, and she can’t wait to see it move into the 600 range.

“The divorce left me financially conflicted for a few years, because my ex-husband handled everything with money, and together we have three children,” she said.

The sad reality is that Sparks is far from alone in discovering she was ill-equipped to handle the financial difficulties of divorce. According to research from UBS Global Wealth Management, 56% of married women said they handle the day-to-day finances but leave key investment decisions to their husbands. This number is actually higher when you look at just millennial women—61% let their partners take the reins on family finances. And 59% of women who find themselves divorced or widowed express regret over not being more involved in long-term financial decisions during their marriage.

Why good credit matters

Having good credit remains the key to staying on top of your financial goals. With a score in the upper 500s, Sparks’ credit barely qualifies as "fair" to the majority of lenders. FICO scores in the 300 to 579 range are considered very poor, and people with scores that low may find themselves with denied loan applications. Consumers with low credit scores also wind up often paying extra fees, are charged high interest rates or will have to put down deposits to gain access to services that people with better scores don’t have trouble obtaining. In general, the higher your credit score, the better options you have for things like lower interest rates on credit cards and loans.

Playing defense

Most people don’t put a lot of thought into their credit during a divorce, but they should. “Clients are often devastated when their spouses leave them high and dry and responsible for all debts in a marriage,” said Steven Fernandez, a certified family law specialist and principal owner/managing partner of Fernandez & Karney APLC. “This can cripple your financial reserve and credit score.”

Women contemplating or currently going through a divorce may be wondering how they can protect themselves financially during a difficult time. As it turns out, there are a few specific areas to consider, and the actions you take today can make a big difference in your financial future.

Here's what you need to do to ensure your soon-to-be-ex-spouse can’t harm your credit.

Order your credit report

The first step, and a crucial one, in protecting your credit during a divorce is to order your full credit report.

“I advise women to do this from the onset of the case so they are aware of any hidden issues—lines of credit, liens, unpaid credits cards—from day one,” said Jackie Harounian, partner at Wisselman Harounian & Associates PC in Long Island, New York. “Most credit reporting agencies allow you to request a review or provide explanation for negative data on a report, including divorce, foreclosure or violations of court support orders by a noncustodial parent.”

Split your joint accounts

The most important advice Alfredo Ramos, business futurist at Ramos Law Group PLLC, in Houston, gives women going through a breakup is to not keep any joint accounts after the final decree of divorce. “Always make refinancing debt into separate payment accounts part of the process,” he said. “This is something the family law attorney can help you do. If you decide to keep a joint account after the divorce, any amount that your former spouse fails to pay will negatively affect your credit.”

Taetrece Harrison, 51, of New Orleans, who is a lawyer herself, has first-hand experience with bad credit because she didn’t split any of the joint accounts she shared with her husband. After their divorce, Harrison’s husband failed to make payments on both a mortgage and car that was still under both of their names. Knowing what she knows now about divorce proceedings, Harrison regrets not removing her name from any financial obligations that included her ex-husband and herself. “Although my ex-husband agreed to pay the debts, his failure to pay would still affect my credit,” she said. “My only recourse against him would be to file a Motion for Contempt, but by then, the damage was already done.”

While removing yourself from joint accounts is important, splitting them isn’t your only option. Both parties could mutually decide to pay them off and close the cards, as well. Keep in mind, though, that “one negative impact of doing this is that the longer cards have held with a good credit record, the more they have a positive effect on your credit report,” said Marilyn Timbers, a New York-based Voya financial adviser who specializes in divorce, retirement and financial planning. “Closing older cards could reduce your credit score, but you will no longer be responsible for any debt that your ex could run up on that joint card.”

Put a freeze on your credit accounts

Once you have moved your debt over to cards in your own name or paid them off, Aviva Pinto, a certified divorce financial analyst and wealth manager at Bronfman Rothschild in New York, suggests putting a freeze on your cards. “Bank accounts can be frozen at your request or by court order,” she said. If you suspect your soon-to-be ex will drain the account or use the funds irresponsibly, she advises women to freeze the account.

File a summons

A summons is an effective way to shield yourself against unauthorized debt run up by your spouse during a period of separation, said Harounian. “The summons is the official commencement of the lawsuit, a filing in court which ends the marriage from a financial standpoint,” she said. “As of that date, unless a court orders otherwise, new assets and debts are deemed separate.”

Create a plan

Keeping track of different credit accounts that you’ve opened, closed or paid off can be stressful, but even more so when you’re also dealing with a divorce. Avoid any additional headaches that can be caused by late or missed payments by signing up for automatic bill pay so that nothing falls through the cracks.

Building back credit

Despite our best efforts, sometimes things do fall through the cracks. If your credit score has taken a dive after a divorce, Steven Millstein, a certified credit counselor and editor of CreditRepairExpert.com recommends starting with a secured credit card that you share with a trusted friend or family member. “Credit cards can be a fantastic, free option to repair and improve your credit score,” he said. “As most credit scoring models incorporate authorized users accounts into their calculation, it can certainly help to have your friend or relative add you as an authorized user to their account. Just make sure you do not co-sign—this would put you at risk for guaranteeing payment on behalf of your friend.”

Once you have access to a credit card, Millstein suggests making purchases between 50% and 90% of your credit limit and then paying off at least 30% of the bill when you get it, although paying it in full is always the best move. “What that’s doing is showing the credit card company and everybody who looks at your credit report that you are being responsible with the new credit that you have, which is the most important thing now on your credit report.”

If your credit score is in good enough shape to apply for a regular unsecured credit card, then this should be your first choice, says Millstein, as it will have the biggest impact on your credit rating. “You would need to have a credit score at least in the 600s to have a chance of being approved for a credit card,” he said. “The average approved score for a credit card is 689, and the lowest approved score is 620.”

One additional word of caution: Millstein suggests women avoid using credit-building loans to help build up credit after a divorce. “A credit builder loan is really no different than a personal loan,” he said. “Most banks do not issue personal loans under $3,000, and with a credit builder loan, banks are simply lending a lower amount, which is usually around $1,000. If you have too many personal loans or installment loans in general, your credit score will be negatively impacted.”

Filing for bankruptcy

If you’ve reached the end of your rope and it seems like bankruptcy is your only option, you should first consider the consequences of such a drastic move. “Filing for bankruptcy will always have a negative effort on a debtor’s credit—it typically lowers credit scores by approximately 200 points,” said Amber Carson, corporate restructuring and bankruptcy attorney at Gray Reed in Dallas. “As such, staying out of bankruptcy is always preferable, if possible.”

After trying every other option, if bankruptcy is still in your future, Carson suggests filing for divorce before filing for bankruptcy. “An advantage of getting divorced first is that it can help a debtor fall under the means test [a formula that makes sure a person's income is low enough that claiming bankruptcy is actually necessary], and thus qualify for Chapter 7,” she said. There are, in fact, two different types of bankruptcy options available:

Chapter 7

This is the liquidation chapter of the Bankruptcy Code, said Carson. “Essentially, the Chapter 7 Trustee gathers all of the nonexempt assets of the debtor and distributes the proceeds to the debtor’s creditors in the priority dictated by the Bankruptcy Code.” Chapter 7 cases remain on a credit report for 10 years.

Chapter 13

In Chapter 13, the debtor files a plan to pay back her creditors and dedicates all of her disposable income to that plan for either three or five years, depending on how much the debtor earns in comparison to her state’s median income. Chapter 13 cases stay on a credit report for seven years. “Lenders may look at Chapter 13 bankruptcy a little more favorably than Chapter 7, because with Chapter 13 bankruptcy you normally agree to repay at least some of your debt. Another upside: Your credit scores can begin to recover even while the bankruptcy remains on your credit report.”

A few steps either at the beginning of a divorce or once a problem with your credit has been discovered should hopefully save women from needing to declare bankruptcy. Because a divorce can be stressful enough, putting these actions in place to ensure you’re taken care of financially down the road can only help you move forward with your life.

Cheryl Lock

Cheryl Lock is a writer who specializes in personal finance topics relating to parenting, real estate and travel, among others. Her work has appeared online at Money, USA Today and Forbes, as well as in national publications like Parents, Woman's Day and Family Circle.