Mohan Jayaraman
Couples at the crossroads of separation have many financial matters to contemplate, sort and manage. At these junctures in life, while it is imperative to be aware of your individual financial profile, it is equally prudent to understand the implications of the separation in cases wherein you have an obligation either as a joint applicant or a guarantor.
This scenario is today shared by couples posed with multiple questions regarding their credit worthiness post separation. With the burden of a divorce, it is easy to forget the financial implications and more importantly the impact that such events could have on one’s credit score.
For example, a couple seeking a divorce decide to go their own separate ways. Having signed all the legal documents for their divorce and splitting key assets, the couple overlooked divorcing their financial obligations that they held together. In this situation, since the divorcees have been unable to meet with their repayment deadlines and have plenty of overdue payments, it is likely to have an impact on their individual credit scores in the long run. If either party chooses to ignore their amplified financial obligations or is unsuccessful at creating separate accounts, it may be tedious for the other to open new bank accounts and obtain new loans in their individual names.
It is a good idea to press on with sorting your finances out, even if it gets complicated. Most lenders are quite used to this situation and can help you out. Keep them informed of your change in circumstances, as it is in their interest to make certain a loan from them is not overlooked and that all parties are aware of their respective liabilities
You are legally responsible for another person’s debt if it is in your and their names or you have agreed to be a guarantor. If a debt is in two people’s names, both are responsible for the amount of the debt. You will not be responsible for any credit obtained by your ex-spouse if this is solely in their name.
Listed below are few simple steps which can improve the management of one’s credit in a hassle-free manner post a divorce.
#1 Check credit reports and credit scores
In an event where one is not financially dependent on the ex-spouse, one could first check his or her joint finances to evaluate loan accounts taken in his or her own name versus loans that were taken jointly. If a couple is in the final stages of the divorce, they should individually inform their lenders to update their records.
Large loans like home loans, may be difficult to refinance. For example, one might have to work with their ex-spouse to pay off the joint loan and then apply for a new one. It is important to be mindful of the fact that the 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 the joint credit card accounts are dissolved after the loans have been repaid. Also, when lenders share information on a joint loan or state the guarantors to a loan, 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 individual credit history. It is advisable to keep the credit limit low to ensure spending within the individual limits. This aids in the betterment of one’s credit health. Paying the bills on time and the building of debt in a rational manner will ensure that one builds 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 the amount of money that is needed and making regular repayments. A big step towards building your finances is creating individual accounts. In current times, recent bill-payment patterns are critical. One’s financial behaviour in the two months after a divorce is the most important while evaluating the person’s credit risk. Late payments may also affect the ability to get a loan in the future.
Author is MD of Experian Credit Information Company of India and Country Manager, Experian India
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