What Effects Divorce Has on Your Credit Score
Collateral harm may occur when finances shift.
Divorce may cause a variety of financial adjustments, including differences in income, costs, and the amount of money you can save. As you realign your current joint accounts to reflect your newly single status, it may have an influence on your credit score.
• Financial changes as a consequence of a divorce may have an influence on your credit score.
• If your former spouse is late or misses payments on joint accounts, it can affect your credit score, therefore you should remove him or her from those accounts.
• Paying your creditors on time is crucial to increasing your credit score.
What Does a Good Credit Score Look Like?
Credit scores vary from 300 to 850, with higher numbers indicating stronger credit. According to Experian, a score of 700 or above is regarded as good, while a score of 800 or higher is considered great. You may still be eligible for credit cards, mortgages, and other loans if your credit score is below 700, but you may have to pay higher interest rates or fulfill additional qualifying conditions.
Following are some things you may take to protect your credit and keep it in excellent shape after a divorce.
Credit Card Accounts Should Be Changed
When a husband and wife share a credit card, the card is normally in one spouse’s name, with the other spouse as an authorized user. (Most major credit card companies will not provide credit cards to those who have joint accounts.) Collaborating to pay off these accounts may be the most effective way to safeguard your credit score. If you are successful, your credit history will not be affected, and your credit score will stay unaffected.
If working together to pay off these accounts isn’t an option, it’s critical to get your name removed from any accounts that your ex is accountable for as soon as possible. This protects your credit history if your ex defaults on a payment or if an account in their name goes into default. Similarly, you should remove your ex-spouse as an authorized user from any account that you still have authority over. They won’t be able to build up a huge amount on your account this way.
Keep an eye on how much credit you’re using.
Expect a minor drop in your credit score if any accounts are canceled, since shutting them will influence your credit usage rate. This number indicates how much of your available credit you are currently utilizing.
Let’s assume you have $50,000 in total available credit (the total limit of all your credit cards and/or lines), and you’re only using $25,000 of it; your credit usage rate is 50%. If you cancel or remove your name from a joint account with a $15,000 credit limit, your available credit lowers from $50,000 to $35,000. Because you are no longer accountable for that account, it subtracts the amount of debt you still owe from the total credit you are using. These adjustments will certainly have an impact on your rate.
If your credit usage rate rises as a result of your divorce, your credit score may decrease a few points, so you should endeavor to minimize it coming ahead.
Although there is no universally accepted definition of the appropriate credit usage rate, many financial gurus advocate keeping it below 30%.
Dealing with Debts that are Shared
It might be difficult to get your name (or theirs) removed off a joint obligation with your spouse, such as a mortgage or auto loan. Despite the fact that your divorce order should specify who is accountable for the debt, the lender will continue to hold both parties legally liable for repayment. If your ex is expected to pay it off but makes late or no payments, that delinquent conduct will show up on your credit report as long as your name is still on the loan.
It’s advisable to have any shared debts refinanced by the person who will be accountable for the debt in the future. The other party will be removed from the loan as a result of this. For example, if you want to maintain paying for your own automobile, you should refinance the current car loan in your name exclusively. If you have a house mortgage in both of your names, however, selling the property may be your only option if neither of you can take full responsibility for the debt.
Make a Change in Income Adjustment
There is likely to be a shift in income after a divorce, which might have an indirect effect on your credit score. Going from a two-income household to a one-income home is the most significant difference. Even alimony and/or child support payments may be insufficient to compensate for the loss. This is particularly true for women, since the US Department of Labor estimates that women will still earn 82 cents for every dollar earned by males in 2021. The gender wage gap is a term used to describe this problem.
With less monthly income, you may have less money for loan and credit card payments, putting you at risk of late or missing payments, as well as a drop in your credit score. Even if you are finally able to make your payments on time, any missed payments will take longer for your credit score to recover.
Create a budget after your divorce to ensure you can plan for—and make—on-time payments to your lenders.
Restore your credit score if it has been harmed.
It’s likely that your credit score suffered throughout your marriage as a result of your spouse’s failure to make payments on time or at all. If that’s the case, you’ll need some time to restore your credit after your finances are straightened up. Making on-time payments is one of the most important ways to restore a bad credit score. Even if you can only pay the minimum amount required, it’s critical to make that payment on time to avoid additional damage to your credit score. If at all feasible, make extra payments at any point throughout the month to assist you to pay down your debt.
Opening new individual credit accounts in your name is another strategy to start improving your credit score. If your credit score is low, you may only be eligible for a secured credit card, which requires you to make a deposit that will function as your credit limit. When your credit score improves, you may be eligible for an unsecured card that you may use to maintain your good credit.
When striving to improve your credit score, though, don’t get carried away with applying for additional credit cards. Although having a large amount of unused credit is beneficial to your credit usage rate, creating too many new accounts at once will hurt your credit score. A hard inquiry on your credit report occurs when you apply for a credit card, which lowers your credit score somewhat. Having a lot of new accounts also lowers the average age of your accounts, which might affect your credit score. However, if you’re looking for a new mortgage or auto loan, credit queries from such lenders are unlikely to harm your credit score.
Maintaining a low debt burden might also help your credit score. Keep in mind that credit bureaus like those who have a low credit usage rate, so paying off credit cards and keeping current credit card balances low can help you raise your credit score. It takes time to repair a bad credit score, so don’t give up if you don’t notice results right away.
A Word of Warning
You may hear about some quick-fix options while attempting to restore or avoid harm to your credit score after a divorce. For example, a credit repair organization may offer to restore your credit for you for a predetermined charge. There’s usually nothing it can do for you that you can’t do for yourself.
Debt settlement firms may also offer to settle your debt for a lower amount than you owe. Not only does this cost you money, but it also has the potential to harm your credit score if, for example, the firm directs you to cease making payments while it “negotiates” with your credit card provider. Your credit score will suffer as a result of the missing payments.
A debt consolidation loan, in which you take out a loan to pay off all of your credit cards, is another alternative. This may be advantageous since you will likely pay less interest over the course of the loan than you would to credit card companies. However, if you continue to use those credit cards after accepting the loan and accumulate additional debt, you may find yourself owing more than you did before, making it more difficult than ever to pay off your debt.
What Effect Does Divorce Have on My Credit Score?
The mere act of filing for or concluding a divorce has no impact on your credit score. Late or missing payments on jointly held debt accounts, as well as large expenditures made by an authorized user on a credit card account, might have an indirect impact. Even if your divorce decision requires your spouse to make payments on a joint account, if those payments are not paid, your credit score will suffer.
Is It a Good Idea to Put My Credit on Hold During Divorce?
It’s possible. A credit freeze essentially limits who has access to your credit record. This may involve a soon-to-be ex attempting to open a new credit account or borrow money in your name. A credit freeze essentially prohibits new credit from being obtained. If your spouse already has access to a credit card account—for example, as an authorized user—a credit freeze will not prevent them from making charges.
During a divorce, what happens to my credit card points?
Some credit card point systems allow you to transfer points across cards, allowing you to split the points with your ex. The cash worth of the points might be added up, and one spouse could buy out the other. If approved, points might be used to pay down the balances on the cards, which could be beneficial to both of you while also possibly improving your credit score as the debt is paid down.
It’s critical to keep a check on your credit record after a divorce to ensure there are no errors. Every 12 months, all customers are entitled to a free credit report from each of the three credit reporting agencies. AnnualCreditReport.com is where you can get your free credit reports. If you find any discrepancies or inaccuracies, follow the instructions provided by the credit agencies to get the problems addressed.
Continue to do all you can to enhance your credit score, such as making on-time payments, keeping your debt load low, and examining your credit report on a regular basis to verify it’s free of errors. Your hard effort will be rewarded with an improved credit score, even if change does not come fast.