Coral bleaching has caused catastrophic changes to coral reef ecosystems around the world with profound ecological, social and economic repercussions. While its occurrence is predicted to increase in the future, we have little understanding of mechanisms that underlie changes in the fish community associated with coral degradation. The present study uses a field-based experiment to examine how the intensity of interference competition between juveniles of two species of damselfish changes as healthy corals degrade through thermal bleaching. The mortality of a damselfish that is a live coral specialist (Pomacentrus moluccensis) increased on bleached and dead coral in the presence of the habitat generalist (Pomacentrus amboinensis). Increased mortality of the specialist was indirectly owing to enhanced aggression by the generalist forcing the specialist higher up and further away from shelter on bleached and dead coral. Evidence from this study stresses the importance of changing interspecific interactions to community dynamics as habitats change.