Divorce can result in bad credit
There are some financial mistakes that most consumers are probably already aware can damage their credit ratings. Then there are the less-obvious events that can cause credit scores to take a nose dive. Divorce falls into this second category.
Very often, divorce leaves former spouses with bad credit because the divorce court's decisions have no impact on lenders. While the judge may decree that one of the divorcing spouses is responsible for the former couple's joint credit card or loan, lenders do not honor the court's assignment of payment responsibility.
Therefore, both spouses credit can go sour if the responsible party fails to make a payment. Both of the exes' credit scores will show the missed payment, meaning two bad credit histories instead of just one.
To avoid walking away from a marriage with bad credit, action needs to be taken well in advance of any potential divorce proceedings.
In fact, married couples should continue to have credit cards, cellphones, bank accounts and more in their own names during the happy times to keep their individual credit histories fresh. However, couples will probably want to apply jointly for expensive purchases where both incomes are needed in order to qualify for a loan.
If each spouse doesn't keep their credit history fresh, their credit reports can become outdated or "stagnant" -- which is almost as if the consumer has no credit history at all.
For couples who are considering a split, they should begin establishing credit in their own names way before filing for a divorce. This can be as simple as each applying for up to three credit cards for people with bad credit (such as a secured credit card), which the individual cardholders makes sure to pay off at the end of each month.
Meanwhile, any joint accounts will need to be converted into individual accounts so that the divorce court can later divide all financial responsibilities. Couples should focus on splitting up credit card accounts, since people are more likely to miss payments on their plastic than on homes, cars, or other secured loans.
By converting joint accounts into individual credit, both ex-spouses won't end up with bad credit if one spouse neglects to make a payment after the divorce is finalized.
See related story: Divorce and debt stories and advice, Help for bad credit, "Divvying up debt in divorce," "9 tips for avoiding ex's debt"
Published: May 25, 2007