How Does Divorce Affect Credit?

I. Introduction

Divorce may be a very emotional situation that can drastically change many aspects of your life, including several things you may not have considered right away. One of these potential challenges relates to how divorce affects your financial situation.

If you’re getting divorced, prepare for significant financial implications, both during and after the divorce. One key factor to understand is how divorce may affect credit.

II. The Direct and Indirect Effects of Divorce on Credit

Divorce immediately changes your financial situation. For instance, you may have less money coming in. However, other changes may not show up right away. Understanding expected changes will help you prepare, mitigate issues that may be caused, strengthen your financial circumstances, and improve your credit in the future.

1. No Direct Impact of Divorce on Credit Scores

You have your own credit score. It is separate from anyone else’s score. This is true whether you are single, married, or divorced. In addition, your marital status is not a factor used to calculate your credit score. The simple act of filing for divorce does not change your credit score. However, the changing conditions in your life may affect your score, as may how you and your ex-spouse managed finances during marriage.

2. Indirect Impacts Explained

During your marriage, you likely shared some financial responsibilities with your partner. When you get divorced, this situation changes. Separating your financial lives when you get divorced may be very challenging.

The financial changes and obligations stemming from divorce don’t just change your day-to-day financial life. They may also affect your credit score. Therefore, you need to understand these challenges and take steps to mitigate the potentially negative impact they may have on your financial situation and your credit.

III. Joint Accounts and Liabilities

As mentioned, your credit score is your own. It is based on your financial life and how you have handled it. When two people get married, each continues to have his or her own credit score; the act of marriage doesn’t directly change your score.

However, during the course of the relationship, you and your spouse may have combined some or all aspects of your financial life. If you have shared accounts or joint debts that you opened with your spouse prior to your divorce, what happens in these accounts will impact your individual credit.

For instance, if you took out a car loan along with your spouse or if both of you are users on the same credit card account, the activities that happen on these accounts are reported on your credit report and your spouse’s. If either of you makes payments, these payments are recorded for both of you.

Therefore, you’ll need to deal with these shared accounts when you get divorced. As long as the account remains open and both of your names are on it, you both remain responsible for it.

IV. Legal Decrees vs. Credit Obligations

It’s important to note that while a divorce is a legal act, it doesn’t necessarily free you from your credit obligations. Your joint credit accounts won’t be split into two when you get divorced.

Your divorce decree may assign legal division of your marital assets and debts, but that doesn’t actually split up your debts. While it stipulates who is responsible for them, it doesn’t change the agreement you have with the lender.

In short, the debt will still appear on both credit reports. This may be a serious issue.

For instance, if you have a joint debt and the partner responsible for it under the decree is unable or unwilling to make payments, then the creditor will hold the other partner responsible. This is true even if you are divorced. Missed payments or late payments will negatively affect both credit scores.

Any purchases made on the account will appear on both credit reports as well. This can potentially hurt your credit score, since it will increase your credit obligations on paper, even if you did not make them yourself. This is true whether you cosigned a loan together or shared a joint credit card.

Therefore, it’s vital that you take steps to separate your accounts. However, when you do this, there are several things you’ll need to be aware of.

V. Credit Score Considerations During Divorce Proceedings

It’s important to separate all joint debts or close the accounts when you are getting divorced. Otherwise, the situation may get very messy and complicated.

However, when you remove a person from a credit account, you are also removing their income and credit history. Therefore, you may see your credit limit decrease on an account. This may have substantial impact on your credit score.

Lowering your credit limit may hurt your credit score because a significant factor used in credit score calculation is credit utilization. This is the percentage of available credit you are using.

For example, if a person has three credit cards and one has a $2,000 limit, the second has a $3,000 limit, and the third has a $5,000 limit, that person has $10,000 in available credit. The optimal amount of credit this person should use to keep a good credit score is around 30% of what they have available. This is around $3,000 or less.

Assume that person gets divorced and removes the former spouse’s name from the $5,000 credit card, which was a joint account. This may cause the credit limit to drop. If it drops $3,000, the person now has only $8,000 of available credit. Therefore, using $3,000 of this credit means the person is using 37.5% of his or her available credit, and that will hurt his or her credit score.

Another way a divorce may negatively affect your credit score is if you are no longer able to pay your debts. Not only is divorce itself expensive, but your financial situation might change when you go from living as a couple to living on your own. If you are used to living off two incomes, surviving on one may require major adjustment. This situation may make it tougher to pay your bills. Failure to pay your bills on time will hurt your credit score.

1. Protecting Your Credit Score

You can safeguard your credit during the divorce process. While each person’s financial situation differs following divorce, many of the steps for protecting your credit score are the same.

First, close any joint accounts you have or convert them into individual accounts. If you’re unable to come to an agreement with your former spouse to accomplish this, then you will need to contact the creditors and inform them of your divorce. Ask to have your name removed from any accounts your former spouse wants to keep open, so that you are not responsible for any future activity on those accounts. Until you do this, you’re still liable for those accounts.

Next, ask your creditors to remove your former spouse as an authorized user on any of your accounts where their name is listed. Authorized users may use the account, but they’re not responsible for paying the bills. If you don’t take an authorized user’s name off the account, that person can spend freely—and you will be on the hook for the payments.

2. Monitoring Credit Reports

When you’re getting divorced, look at your credit report and take note of every account listed. If you have been married for a while, there may be some accounts you don’t remember or joint accounts you remember as individual accounts. Use the information in your report to help you identify the accounts needing action.

You’ll also want to check your report regularly after the report to ensure any changes you’ve made to your accounts are reflected accurately. Checking your report regularly may also help you see how your credit is doing post-divorce, so you can act to improve your score.

VI. The Impact of Alimony and Child Support

Not paying child support or alimony payments after you are divorced will hurt your credit score. For example, a missed child support payment will be reported to the credit bureaus, and that information will hurt your credit score. Missed payments may remain on your credit report for up to seven years, so it’s important to always make these payments on time to avoid serious harm to your credit score.

However, making these payments on time doesn’t help to improve your credit.

VII. Rebuilding Credit Post-Divorce

Once your divorce is finalized and all joint accounts are closed or converted into individual accounts, you’ll need to start working on rebuilding your credit. Even if you had good credit before, closing or modifying accounts may have affected it, so you’ll likely have some work to do.

1. Steps to Rebuild Credit

One of the most important things to keep in mind following your divorce is that your financial situation has changed. This means you must act and spend differently than you did when you were married.

Staying on top of payments is critical. One of the most important factors used in credit score calculation is your payment history. Making payments on time slowly works to improve your credit; however, even a single missed payment can cause serious damage.

You may need to cut costs and adjust your expenses to ensure you have enough money to cover all your debt payments. Schedule payment reminders for yourself, so you always pay on time.

2. Securing Credit in Your Own Name

Once your divorce is finalized, you may want to get new credit in your own name. This is especially true if you closed several accounts earlier. Unfortunately, getting new credit may be tough to do, especially if the divorce damaged your credit report.

Following good credit habits helps. Stay on top of your payments and always make them on time. Pay attention to your credit utilization. Don’t apply for credit you don’t need. Over time, these actions will improve your credit score, and that will make it easier to get new credit when you need it.

VIII. Financial Management After Divorce

Your financial situation will be different after a divorce. Therefore, you will need to manage your money and your obligations differently. Creating a budget and tracking your spending will help you manage your finances.

IX. Expert Financial and Legal Advice

There are numerous financial and legal considerations to pay attention to before, during, and after the divorce process.

1. Financial Planner Insights

One of the most important things to do after a divorce is to create a new budget. Whatever your situation was before, there’s a good chance your finances will be different now. You may have less money coming in, you may no longer be able to share certain expenses, and your credit score may have dropped.

By creating a new budget and sticking to it, you’ll be able to meet all your financial commitments without adding on new debt. This will put you in a stronger financial position, and you’ll also be helping improve your credit score by controlling your debt level and making payments on time.

2. Legal Perspectives

Maintaining a civil relationship with your former spouse during the divorce process will make things easier. However, if that isn’t possible, then you will need to do significant work to close accounts, remove names, etc. before your divorce is formalized.

If you’re not able to resolve shared accounts and debts as a part of the divorce proceedings and your spouse is not handling those shared accounts according to the terms of the divorce, then you may need to take legal action against them. This is often complicated, stressful, and expensive; therefore, it is highly recommended you resolve these issues during the divorce process.

X. Case Studies and Real-Life Scenarios

The reality is that even someone who is in a strong financial position prior to divorce may have trouble maintaining a good credit score afterward. Your credit limits on various accounts may have been lowered, which will affect your credit utilization. You may have had to close old accounts, which will affect your credit history. You may have had to open new credit accounts after your divorce, and that involves new inquiries into your credit, which can lower your score.

Therefore, anyone who goes through a divorce must adjust their financial situation and their future plans, at least for a while, until they adapt to the new reality.

XI. Additional Resources and Support

Divorce is emotional and stressful. The good news is there are places where you can get support and assistance. For instance, a financial advisor or credit counselor can help you navigate post-divorce finances and assist you with budgeting, debt repayment, and steps you can take to protect and improve your credit score.

XII. Conclusion

Most divorces are difficult for many reasons. Amid emotional pain, massive life changes, and so many other things to deal with, it’s important not to neglect your financial situation. That includes your credit report. By making plans and following smart strategies to mitigate negative impacts, you will find yourself in a strong financial position post-divorce.