Divorce often inspires adults to “reset” financially. They may create new budgets, pursue a greater understanding of their financial needs generally and take a good, hard look at their income and debts specifically.
If you and your spouse are going your separate ways, you may be understandably concerned about how you’re going to divide responsibility for any joint accounts – assets and debts alike – before moving forward in different directions. Some of these accounts may be transferred to one spouse and others may be closed outright. When it comes to credit card accounts, which approach is preferable?
There is no one-size-fits-all solution
If a card is jointly held, both spouses are legally responsible for the balance—even if only one person used the card. During divorce, these accounts can pose a significant risk to the future financial health of one or both spouses. If your ex runs up charges on a joint card and fails to pay, the creditor can still come after you. For this reason, many people choose to close or freeze joint accounts early in the divorce process to prevent further shared liability.
However, simply closing all accounts isn’t always wise. Your credit score is based, in part, on your credit history and your credit utilization ratio. Closing long-standing accounts or reducing your overall available credit can negatively affect your score. If you’re preparing to refinance a home, rent a new apartment or apply for loans in the immediate aftermath of your divorce, you’ll want to protect your credit rating right now.
On the other hand, if your spouse is only an authorized user on your individual account, removing them is a smart step. Otherwise, they may be able to continue making charges that you will be responsible for.
During divorce proceedings, it’s often recommended that each spouse should run a full credit report. This allows both parties to identify which accounts exist, who is responsible for them and whether any should be closed, froze or transferred.
Courts will often divide debt responsibility as part of the divorce agreement, but remember—creditors are not bound by divorce decrees. If your name is on an account, you’re still liable for the debts attached to it, regardless of what your divorce judgment says. As a result, formally transferring an account to one person is generally wise. Closing certain accounts altogether can also be a solution if taking a temporary hit to your credit won’t affect your finances too badly.
At the end of the day, don’t rush to close all your credit cards without evaluating the full picture. A strategic approach tailored to your circumstances can help you to protect your credit, reduce financial risk and help you start the next chapter of your life on solid footing.