- How are credit cards handled in divorce?
- Can I cancel joint credit cards during my divorce?
- I’m not sure if both our names are on the credit card. What should I do?
- Should I pay off credit cards before or after divorce?
- How to create a payment plan
- Debt consolidation and refinancing
- Benefits and risks of credit cards
- FAQ
- References
Credit card debt can be a source of contention during divorce, especially if you and your ex's spending habits differ greatly. Debt on joint accounts can impact your finances before, during, 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.
How are credit cards handled in divorce?
During your marriage, you may have shared most or 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, any debt on these accounts will need to be divided during a divorce.
Settlement agreement
If your divorce is amicable and uncontested, the two of you can account for your debts and assets as part of a settlement agreement. This is an agreement divorcing couples draw up as a part of their divorce process when they agree upon all aspects of the split, from who will keep certain assets to who will pay off debts.
Court involvement
If your divorce is contested, meaning the two of you are unable to discuss your divorce terms and come to an agreement, decisions regarding your credit card split (including the division of any debt) will be handled during the divorce proceedings by a court.
Mediation
Fortunately, there is a middle ground. If your divorce is contested but you think the professional help of a trained mediator could help, you may be able to resolve your card-related disputes in mediation.
How does the state I live in affect my credit card debt division?
All states fall into one of two property-division categories in divorce: community property or equitable distribution.
In a community property state, all marital possessions and debts are considered equally owned by both spouses. As such, your credit card debt is likely to be split 50/50 in your divorce. So, if you owe $10,000 on a card, you would each actually owe $5,000. It doesn’t matter if one person used the card more than the other.
There are only nine community property states in the country: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
In an equitable distribution state, all marital possessions and debts are divided fairly, but not necessarily 50/50, in divorce. Your joint credit card debt of $10,000 may go all to you, for example, and your spouse might be ordered to pay the remaining $10,000 balance on your mortgage.
Read: Equitable Distribution States vs. Community Property States
Can I cancel joint credit cards during my divorce?
Joint cards with no debt
If a joint credit card has no debt on it, you should have no trouble closing your account as long as both of you agree to it. Notably, both people would have to sign off on the account closure, which could be problematic in the face of a messy divorce.
Joint cards with outstanding balances
If there is an outstanding balance on the card, the credit company may refuse to close the account until you pay off the balance. But since you’re getting divorced, who is responsible for paying off the balance?
Long story short: If your name is on the account, you are responsible. It doesn’t matter if you get a divorce decree from a judge stating that your spouse should pay off all the credit debt. The credit card company is not obligated to release you from the debt because it says so on your divorce decree.
If the two of you are amicable and intent upon an uncontested divorce, you can work out who is responsible for the debt and put it in your marital settlement agreement. However, you should know that if your spouse takes on the debt in your marital settlement agreement – but then fails to pay the debt in a timely manner – it would impact your credit score, too.
If your divorce is contested, you will need help from the court in dividing your credit card debt. But, as we mentioned, you will still be on the hook for the total amount, regardless of what your divorce decree from the court says.
I’m not sure if both our names are on the account. What should I do?
You will want to find out if both names are on the account because, as we’ve mentioned, anyone whose name is on a credit card is responsible for the associated debt. It doesn’t matter what a judge says or what you agree to in your marital settlement agreement. Bottom line: The credit card company wants to be paid back. Since your name is on the card, you are a responsible party.
Let’s say you share a credit card with no debt on it. That’s great news! But, to avoid risk, you should strongly consider canceling the shared credit card. The two of you might be amicable now, but if something goes awry and your spouse racks up a bill, you will both be responsible.
If, unbeknownst to you, your ex is also on your credit card, additional spending and debt could accumulate without you knowing it.
Call your credit card companies
Even if you think you have identified every single credit card in your name, it’s a good idea to take the time to call the banks and credit card companies you have worked with in the past. This way, you can confirm where you have joint accounts set up. If you have online access to your accounts, this process can be even easier.
Once you know where you have joint accounts, you can talk with your credit card providers about what would be required to close those accounts. Often, this entails paying off existing balances. That said, the requirement to pay off all debt before closing the account could possibly be negotiated with the credit card company. This is usually only done on a case-by-case basis, so check with your bank to see if it’s an option.
Get a free credit report
You can get a full list of your credit cards, any associated debt, and information about whether the debt is jointly owned by obtaining a free credit report. A free credit report may be obtained at www.annualcreditreport.com, or you can visit Experian directly at Experian.com to ask for a report.
Should I pay off credit cards before or after divorce?
If you have credit card debt, you will ideally want to pay it off as soon as possible so the debt isn't troubling you after your divorce. At some point in your divorce process, your credit card debt will be split between yourself and your spouse. As such, it may make sense to wait until you know how much debt you will be responsible for.
When we say “wait,” we don’t mean you should skip your monthly minimum payments while your divorce is pending. These should still be paid. But if you intend to pay off large chunks of your credit card debt, your money may go farther if you wait to spend these larger chunks until after the debt has been divided.
However, if you cannot trust your ex – your joint credit card holder – to keep their hands off the card, it may be best to pay off the balance as soon as possible and shut the card down.
You may feel like your spouse is more responsible for the debt than you. But in the end, your divorce decree will specify who pays it, whether that’s determined by you and your ex or by a judge.
How to create a payment plan
As credit card debt accumulates over time, so does the interest due on the debt. What you initially spent on your credit card will not be what you end up paying. You may have a large balance that takes time to pay off.
It's important to have a payment plan in place to help make payments as manageable as possible.
First, you need to figure out how much you owe. Divide that by the amount 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 know you could pay off the debt (minus interest) in 10 months.
Then, create a payment goal date. Having a specific date in mind can help you create a positive mentality toward debt payments. Paying more than the minimum due each month is one of the best ways to pay of debt faster and with less interest.
Debt consolidation and refinancing
Establishing the goal of paying off your debt is great, but what strategy (or strategies) will you use?
Two debt payment strategies you might use to speed up the process of paying down your debt are debt consolidation and refinancing. Both options may serve you well if you have multiple debts spread across different credit card accounts.
Debt consolidation: When you consolidate credit card debt, you convert smaller debts into one lump sum owed to one creditor. There are debt consolidation companies out there that want your business, so shop wisely. If you qualify for a consolidation loan with a lower interest rate than your current credit cards, you could save money on interest charges. However, there may be additional fees to pay, and getting a debt consolidation loan can impact your credit score.
Refinancing: You might decide to refinance your credit card debt by transferring it to a lower-interest credit card. For example, some card companies offer cards with 0% interest for the first six months to entice you to transfer your balances to one of their cards. However, there may be fees involved in this action, and again, your credit score could take a hit for it.
You may have heard of a debt payment process called the snowball method. Put simply, the snowball method involves paying off the lowest debt first. Then, you can shift the money you were paying toward that debt to your other debts, tackling each debt one at a time until everything is completely paid off.
Benefits and risks of credit cards
Credit cards can be helpful tools, but they can be misused and create difficult financial situations. By understanding the risks and benefits, you can safely use them to your advantage. By understanding how debt repayment works, you can make smart decisions about how to handle any remaining debt you have after your divorce.
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. It's an 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 is cashback bonuses. These are small percentages of money you get back as an incentive for using the credit card. They 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.
Risk: Overspending
Access to credit can easily go awry, unfortunately. One of the biggest challenges when it comes to credit cards is that it can feel like you have a lot of money when you actually don’t.
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 tend to have high interest rates compared to other financing options. Some cards have interest rates of 20% or 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 borrowed.
FAQ
Is an authorized user different from a joint credit card holder?
Yes! And in the instance of divorce, the distinction between authorized users and joint account holders is an important one.
- An authorized user is someone who has been authorized to use a credit card belonging to someone else. This person can use the card as much as they like, and they are not responsible for the debt.
- A joint account holder, on the other hand, is a co-owner of the account and responsible for any debt accrued on the card.
If your spouse is an authorized user, you are responsible for any purchases they make. Perhaps more importantly, they are not responsible for the debt. But if they are a joint account holder, both of you are responsible for paying back the debt, and both of you would suffer consequences for late payments and snowballing debt.
I know I’m getting divorced. When should I open a new credit card for myself?
It’s a good idea to have a credit card in your name waiting for you when you start your new, single life. You can use it for items you need and, perhaps more importantly, you can use it to build a good credit history in your name.
When you apply for a credit card, the company considers your household income when determining your credit limit. So, if you’re still married, you can include your spouse’s income in that quote, even if you know you’re about to get divorced.
Because of this, the best time to open a new card in your name could be while you are still married and perhaps even before divorce proceedings are initiated.
When should credit cards be used?
Credit cards can 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 use it in place of a debit card or cash to benefit from the cashback rewards.
However, you are likely to lose out in the end if you don’t pay off your debt within a short period. This is due to the accumulation of interest, which is how credit card companies make money.
References
Get your free credit report and FICO score. Experian.com.Credit Card Debt Payoff Calculator. MeetTally.com.
How to reduce your debt. Consumer Financial Protection Bureau.
.png)
What Should You Do With Your Marital Home in Divorce? Explore Your Options.
