How can I prevent joint accounts from causing credit damage?
If you’re recently divorced and owe money on joint accounts, it’s time to pay them off and preserve your credit score.
I am recently divorced and I’m trying to get my financial world in order now that everything’s been settled. Unfortunately, since I was the sole breadwinner for the fifteen-year marriage and my lawyer did a lousy job, I’m on the hook for all of the credit card debt we had on our joint accounts. Even more unfortunate, there’s a lot of it, so I’m worried it’s going to take me forever to pay it off. Is there anything I can do to pay it off quickly? And, how do I make sure these joint accounts don’t come back to bite my credit score?
Prince Edward Island
Sorry to hear about your divorce. It’s a tough time. There can be a lot of changes and challenges – both emotionally and financially. Still, it sounds like you’re off to a good start – especially since you’re already concerned about your credit score.
I’m going to answer your two-part question in reverse because ensuring the accounts don’t come back to haunt your credit is the easy part. The good news is that it is often advisable to keep control over your joint accounts in a divorce. This puts you in complete control of your credit history. I’ve counselled many people whose credit was ruined when their ex-spouse failed to pay on a joint account.
Even though the court dictated responsibility to one person, the creditors will hold both parties responsible. In your case, you are in control and you ex is at risk if you don’t pay. As long as you control all of your joint accounts, your ex-wife won’t have any ability to affect your credit score. As long as you pay off the debts in-full on a schedule that your creditors agree to, your credit won’t take a hit. Just be sure to close the accounts to avoid any additional charges.
The next thing to do is figure out your finances so you can get the debt paid off quickly…
Even though your ex didn’t contribute income since you were the sole breadwinner, you should still build a new budget. While you’re reviewing the numbers, you can also decide if there’s a way to pay off your debt within your budget or if you need to find an alternative solution.
The goal is to reduce your credit card debt as efficiently as possible. That means paying as much as possible every month, because the longer you let the debt sit, the more it grows with interest added. If you look at your budget and you see a lot of discretionary expenses (wants) that you can cut temporarily, then you may be able to free up enough cash that you can pay off your debt quickly in big chunks.
If you find there is just too much debt to eliminate quickly even if you streamline your budget, then start to investigate debt consolidation. That’s when you take all your credit card debt and consolidate it into one low-interest monthly payment. You can do that by transferring your balances to a low rate credit card – hopefully one at a 0% APR if your credit is in good standing. A charge of 3% to 5% usually occurs when you make a balance transfer but you can find cards that offer the 0% rate for an introductory period for up to two years. So you’ll want to pay off the debt within that timeframe.
Another option is a taking out an unsecured debt consolidation loan. But again, in order to qualify for such a loan you’ll need good credit. That’s the way it works with most do-it-yourself debt consolidation strategies. With such a loan, you’ll again only have one monthly payment, which helps decrease the confusion that occurs when you’re paying several credit card bills each month. The key is to secure a lower interest rate.
Another option many people choose is a debt management program. You can still roll all your credit card debt into one low interest payment per month, but the program doesn’t require a great credit score to qualify. It’s important to note that the program shouldn’t decrease your credit score as long as you make all your payments on time.
Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).
If you have a question about a debt management program or just about finance in general, Jeff is here to help. Send us an email with your question to AskJeff@ConsolidatedCredit.ca. You’ll get the expert advice you need and your question may be featured here on our website.