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Splitting Up: Avoid Turning Your Personal Finances into a Divorce Statistic

By (view all posts by NerdWallet)
at 7:55AM Wednesday March 2, 2011
under Personal Finance

You've split up the furniture, decided who's keeping which novelty mug, and said your courteous and warm goodbyes to your former spouse who will remain your close friend. Okay, maybe not so much the last one. But you get the idea: you're dividing the loot. Unfortunately, extricating your previously communal finances is a bit more hairy.

Depending on how your divorce goes, you may have to find a new place to live, open new savings and checking accounts, and perhaps find a new job--all of which can be compromised by bad credit.

And while you're setting off on a whole new stage of your life, your previous debts will follow you like that one cheapskate wedding guest who asks if he can have his melon baller back. Staying on top of your finances just got harder, but trust me, you'll want to keep them in order.

Too Little Credit

Whether you worked in or out of the home during your marriage, you've probably accumulated some credit history. A loan taken out in both yours and your ex's name will still reflect on your own credit history, for better or for worse.

Even if your primary role in your former marriage was in the home, you probably have generated a credit history in some way. If you've kept up with your debts, this should only be beneficial to your overall rating. Even having a limited credit history isn't the end of the world though. Starting out with a credit card that has a low balance ceiling or requires you to pay the equivalent of your balance up front can start you on the road to healthy credit.

"I Owe How Much?"

However, even a top-notch credit score can be shaken by divorce. For example if the credit accounts you shared with your spouse are closed but not fully paid in the event of divorce, you will have less credit available to you, but roughly the same balance that you had previously. So, your ratio of available credit can decrease relative to your outstanding debt, which can dent a pristine credit history.

If you don't want to end up in such a situation, try and settle whatever you might owe in common before divorce proceedings begin. However, that's not an option in many cases, so a further alternative is to work with your ex to split up your balances equally. In this case, balance transfer credit cards may be a convenient method to shift existing debt into new accounts held under each ex-spouse's name individually.

Money,Trust and Divorce

Usually, ending a marriage isn't the crash-and-burn catastrophe that is often portrayed in the movies. Actually, it's not unusual that divorce agreements contain considerable space for both former spouses to get their accounts to where they need to be. However, while this can be beneficial, it's necessary to strongly question an agreement that doesn't end with all financial links being broken.

Here's an example of what can happen: Steven and Roberta end their marriage after buying a home together. Rather than put the house on the market and divide the money they make, Roberta is buying the property from Steven. They agree that Roberta will refinance the house and give Steven his money within half a year. In the meantime, Roberta will be making all mortgage payments.

In a few months, Steven fills out a new credit card application, only to discover that his credit rating has tanked. How did this happen? Roberta couldn't maintain the mortgage payments as planned and now Steven is stuck with the consequences. Keep in mind that getting divorced means you're going to be financially autonomous individuals, and that means responsibility for managing debt should be your own.

Keeping out of this territory means that finalizing your divorce coincides with ending any financial relationship with your former spouse. This can be a huge help in preventing divorce from having a deleterious effect on your credit rating. With some foresight and care, you can maintain your financial health through the process.

Tim Chen is founder and CEO of NerdWallet.com, a site that helps consumers compare the best rewards credit cards.