Managing credit post a divorce: A separation of financial lives
Divorce or a legal dissolution of a marriage often leaves many couples in tatters, not alone from emotional issues, but by complex financial matters that could inflict a lasting impact on future lives unless they carefully contemplate, sort and manage them at the earliest.
While it is imperative to be well-informed of your own financial profile, it is far more significant to understand the implications of a separation - in situations wherein you have an obligation - either as a joint applicant or a guarantor since it could leave a long-term impression on your credit worthiness.
Often, couples seeking divorce would sign all basic legal documents including those to split their key assets though many tend to overlook their jointly held financial obligations. In such a scenario – wherein divorcees fail to keep their repayment deadlines or have plenty of overdue payments - it can utterly mar their financial profile. And if either party chooses to ignore swelling financial obligations or becomes unsuccessful in creating separate accounts, it will become difficult for the other to obtain credit, or at times, even to open a bank account.
Thus, it is good to sort out your individual finances even if it is complicated. Obviously, most of the lenders are used to such situations hence would be willing to help out. Keep them informed of your changed situation as it is in their interest to make certain that their loan is not unheeded and that all parties are aware of their respective liabilities. You are legally responsible for another person’s debt - if it is also in your name or that you have agreed to be a guarantor.
Here are few simple steps that can improve your credit profile post the divorce:
#1 Check credit-reports and credit scores
If an individual is not financially dependent on the ex-spouse, he or she should verify loan accounts – both individual loans and joint accounts - to evaluate personal liabilities. If a couple is in the final stages of divorce, they should individually inform their lenders to update their records. Even though large loans like home loans could be difficult to refinance, one might have to work with the ex-spouse to pay off a joint loan and then apply for a new one. It is important to keep in mind that an ex-spouse's actions can affect the partner’s current credit score.
#2 Dissolve all joint cards and accounts
Usually, married couples apply for loans together. In the event of a divorce, this would result in them having joint loan accounts and credit cards or being guarantors to each other’s loans. Post the divorce, it is imperative to ensure that all joint credit card accounts are dissolved - after paying off loans, if any. One should remember that when lenders share information on a joint loan or list the guarantors, the information is reflected on one’s credit report along with the complete credit history. This, in turn, affects the individual credit score.
#3 Establish credit independence
The first step to safeguard financial freedom is to rebuild the individual credit history. It is advisable to keep the credit limit low to ensure that the spending is within the individual limits which would boost one’s credit health. Paying bills on time and building debt in a rational manner will ensure a good credit history over a period of time.
#4 Re-create individual credit history
The key to building a good credit score is to show that one can manage his or her credit responsibly. This includes borrowing only the desirable amount and servicing it dutifully. A big step towards building your finances is by creating individual accounts. Markedly, one’s financial behaviour – especially in the immediate two months after the divorce – gives ample indication to a person’s credit risk.
Contributed by Mr. Mohan Jayaraman, Managing Director, Experian Credit Bureau, India
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