Credit Cards during and after Divorce
- How are credit cards handled in divorce?
- Can I cancel credit cards during my divorce?
- Should I pay off credit cards before or after divorce?
- How to create a payment plan
- Benefits and risks of credit cards
- When you should use credit cards
Divorce can be financially detrimental to both parties involved. Between legal fees and the costs that can be incurred when dividing assets, these financial factors can have a major impact on divorcees. Financial concerns are also a leading factor many people wait so long to file for divorce. Many turn to credit cards as a temporary fix – but that's not always wise.
Credit cards debt is a source of contention during divorce, especially if you and your ex's spending habits differed greatly. Debt on joint accounts can impact your finances both before and after your divorce. If you are going through a divorce and are concerned about credit card use and debt, there are several important considerations to keep in mind. Keep reading to understand how to handle your credit cards during and after your divorce.
How are credit cards handled in divorce?
During your marriage, you may have shared most, or maybe all, of your financial accounts with your spouse. Since you and your ex may have had (or still have) access to the same bank accounts, investments, and credit cards, these accounts need to be divided during a divorce. Some of this will be handled during the divorce proceedings by a court, while other aspects of this can be handled by you and your spouse privately. Accounting for debts and assets is part of your settlement agreement.
Can I cancel credit cards during my divorce?
Making sure that you have a new credit card that your ex does not have access to after your divorce may be especially important to you, if not before it's finalized. If you aren't certain that you're the only person on your credit card, additional spending and debt could be accumulated without you knowing it.
To avoid this risk, you may want to consider canceling any credit cards that you and your spouse shared. To do so, first make sure that you know which joint accounts you have, and if all of them have been accounted for. Even if you think you have identified every single one, it is safer to take some time to call the bank and credit card companies you have worked with in the past. This way, you can confirm where you have joint accounts set up so that there are none you are unaware of.
Once you know where you have joint accounts, you can talk with your credit card providers about what will be required to close out these accounts. Oftentimes, this will mean paying off any existing balances. However, this requirement to pay it off before closing the account can often be negotiated with credit card companies so that you may be able to pay off the balance for a short period after the account is closed. This is on a case-by-case basis, so check with your bank and see if this option is available to you.
Should I pay off credit cards before or after divorce?
If you've accumulated credit card debt during your marriage, you will ideally want to pay off this debt not long after your divorce so that it isn't something you need to worry about in the long run. At some point during divorce hearings, debts and assets will be split between you and your spouse.
Handling all the debts you might incur as soon as possible may help alleviate financial difficulties in your life and give you a greater cash flow to go toward other expenses. However, paying off your credit card debt might be easier said than done. For example, you may feel like your spouse is more responsible for the debt than you.
While most of your shared debt will be looked at as something you are both equally responsible for, if things between you and your ex are amicable, you may wish to work out a private payment plan (outside of the court's jurisdiction).
How to create a payment plan
As credit card debt accumulates interest over time, what you initially spent on your credit card will not be what you end up paying back. Because there could be a large balance, which could take a long time to pay off, it's important to have a payment plan in place to help make this stage as easy to manage as possible.
To create a payment plan, first, you need to figure out how much you owe. Then divide that by the amount that you can allocate from your budget toward paying it back. For example, if you owe $1,000 in credit card debt, and the max you can spend on it each month is $100, you can know that your debt can be paid off in 10 months. Having a set timeframe and payment goal in mind like this can help create a good mentality toward debt payments. Ideally, paying above the minimum monthly amount will only help you get the debt paid off in a timely manner.
Finally, there are many debt payment strategies you can utilize to help speed up the process. You could look into debt consolidation and refinancing options if you have multiple debts spread across many different credit card accounts. You can also utilize debt payment methods such as the snowball method to help move the process along quickly and get you out of debt sooner rather than later.
Put simply, the snowball method involves paying off the lowest debt first, so you can put those payments toward larger debts, tackling each debt one at a time until everything is completely paid off.
Benefits and risks of credit cards
Credit cards are a helpful tool, but they can be misused and create difficult financial situations. By knowing what their risks and benefits are, you can safely use them to your advantage, as well as knowing how to recover from existing financial difficulties that have arisen due to mismanaged credit cards.
Benefit: Access to additional money
One of the first major benefits of a credit card is that it allows you to have a payment option in your pocket at all times. A credit card allows you to have funds on hand you wouldn't necessarily have otherwise, and it's a very accessible way to pay for things on the go. This makes credit cards a very convenient financial tool.
Benefit: Cashback bonuses
For those who use credit cards responsibly, another benefit can be cashback bonuses. Cashback bonuses are small percentages of money you get back as an incentive for using the credit card. These can be rewards for general purchases or more specific ones like gas and groceries. The percentage is usually not major, but it can add up in the long run, so make sure you look into all of the options available for cashback programs when picking a credit card.
However, this ease of access also means it can be overused. One of the biggest challenges when it comes to credit cards is that it can feel like having a card with as much money as you need on it. By the end of 2020, total credit card debt in the U.S. was $825 billion, so it's no secret many Americans rely on credit cards and struggle with their financial burden of them.
Risk: High interest
Credit cards also often have high interest rates, compared to other financing options. Some cards have interest rates upwards of 20% – sometimes even more. This, of course, depends on the credit card and company you sign up with, so be on the lookout for your rate when you commit. If your card interest rate is higher than 0%, this means that if it isn't paid off soon, it will cost you more than you intended.
When you should use credit cards
Credit cards should be used when you need to delay the payment of a purchase to free up your cash flow. If you have a credit card, you can also opt to use it in place of a debit card or cash to benefit from the cashback rewards. In addition, they can be especially helpful if you're certain you can pay them off within a short period so that they don't accumulate interest.
Credit cards aren't the only financing options available. Depending on your needs and what you plan to use additional financing for, you may want to consider other types of financing such as personal loans or lines of credit.
Credit cards can be difficult to navigate, especially while working through a divorce. However, with the right knowledge about how to utilize a credit card, and manage your finances post-divorce, you'll be on track to making credit cards an asset in your life, rather than a liability.
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