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Preparation can save your credit during divorce

The casualties of divorce include children, family, friends and society. Add one more: credit.

If I were to make a list of the top causes of plunging credit scores, divorce would definitely be in the top five. And many service members have written to me about the sad state of their credit after a divorce.

I’ve been through divorce — twice. More than half of you have been or will be divorced, statistics show. And if you’re not careful, a divorce can lead to 24.99 percent interest rates on your next vehicle purchase or prevent you from buying a home for years to come.

If you take nothing else from this article, remember you need to pay attention to your credit if a relationship should fall apart.

I’m not saying you should expect a failed marriage, but if you handle your credit properly during your relationship, your credit scores will suffer the least damage possible should a divorce happen. If you don’t protect yourself and your credit along the way, you could leave yourself open to a situation in which your spouse damages your credit intentionally.

Having or signing for joint accounts, or signing for another person’s credit, is probably the chief reason people are caught defenseless and open to credit damage as relationships break up. A joint account means you applied for and received credit with another person. It means both people are responsible for paying back the debt. Both.

What happens to joint credit holders when the person who usually pays the bills stops making the monthly payments? Both earn late payment reports on their credit reports. “It’s her/his car” is not something the auto lender or the credit agencies care about. Late payments are late payments, and joint account holders suffer equally for the actions of one.

And like every bad situation, this one can get worse. Late payments are just flesh wounds to your credit scores.

Continued failure to pay debts will result in actions that can include:

• Collections.

• “Charge-offs,” when the original creditor gives up trying to collect and passes on the debt to a collection agency or lawyer for possible lawsuit.

• Closure of accounts by creditors.

• Repossession of cars or other items.

• Lawsuits which could lead to civil judgments being reported on your credit reports.

And while credit is never truly dead or destroyed, credit reports with such problems are definitely in critical condition, and recovery is slow and costly in terms of interest rates for vehicles.

So how can you protect yourself?

Don’t co-sign. Never co-sign for a vehicle loan for anyone. I have seen too many auto repossessions on credit reports that would otherwise be perfect. If you must co-sign for a child, a relative or a friend, make sure that the payments come to you, and you in turn make the payments to the creditor. Even if you don’t receive the money from your co-signer, at least you can pay the creditor yourself and your credit won’t suffer.

Split your credit. I know of many couples who intentionally split their credit. Usually, one spouse’s credit is kept healthy and the other’s is put at risk. This is especially true for people starting businesses. All of the credit card debt goes on credit cards only one spouse is responsible for. That way, if the business fails, they can still get good rates on vehicle loans on the other’s credit — maybe even buy a house.

Designate a bill-payer. Not everyone is good about paying bills. In my experience, there seems to be one person who is better than another at bill-paying in every relationship. Who is that person in your house? That person should be responsible for paying all of the bills. Sometimes, both people need to learn a good bill-paying system and then stick to it. Alternatively, you can use a bill-paying service. Such services are easily found through Internet searches, but be sure to research the service before you sign on.

You would not believe how many times each week people come to me for a home loan and I find that they paid auto loans and credit cards late in the same month that I’m pulling their credit report. They expect to borrow hundreds of thousands of dollars with no money down, and they can’t even pay a $29 minimum payment on time or they let a $114 cell phone bill go to a collection agency.

If you have joint accounts, your relationship is falling apart and you disagree on everything, at least agree on who is going to be responsible for paying joint accounts. Find some way to agree and some way to protect your own credit.

Your spouse may have indeed overspent and fighting over the balance may make you feel better in the short term, but months or years later you may be sorry about not having paid that $2,500 yourself.

Dave Peters is a semiretired loan officer and credit repair specialist. He is a trustee of the nonprofit organization Credit Learning Systems, which teaches college students about credit and debt. He’s author of the book “How Credit REALLY Works” and is a guest on radio shows nationwide. E-mail him creditmatters@atpco.com.