If you are facing a divorce, it has the potential to adversely impact your credit score for the foreseeable future. Although the credit reporting agencies do not lower your score simply because your marriage has been dissolved, some of the financial consequences of the process can cause your score to drop. This can happen even in the most amicable divorces.
Here are some ways divorce can hurt your credit score:
- Spouse Runs Up Debts: Once a couple decides to get a divorce, it is not unusual for a spouse who is upset or wants to be spiteful to start spending wildly on credit cards. Since one of the factors the credit reporting agencies look at is credit utilization (the percentage of your available credit you have used for purchases), your score could drop significantly just by having these additional debts on the report.
- Spouse Does Not Pay Debts: Closely related to the first point, a spouse that has run up debt might refuse to pay on it, even the minimum payment. Late payments are looked at very negatively by the credit agencies. If you are 30 days or more late on any of your accounts, it will cause your score to drop. If this happens with multiple accounts and/or you get 60 or 90 days (or longer) behind, you can expect your score to fall by a couple hundred points or so. This could make it nearly impossible to get any kind of credit for a while.
- Drop in Income Reduces How Much You are Allowed to Borrow: When a couple gets divorced, it essentially means having to support two households (rather than one) on the same overall income. This means double the housing costs (e.g., mortgage/rent, utilities, groceries, etc.) and much tighter household budgets. With a lower income, you are less likely to be able to qualify for new loans or lines of credit.
- Bankruptcy: In the worst-case scenario, the effects of the divorce can result in financial hardship, and the only way out might be bankruptcy. This should be seen as a “last resort” option, because bankruptcy can damage your credit score more than almost anything else.
Improving Your Credit Score During and After a Divorce
Getting a divorce does not have to be damaging to your credit score, but you need to be proactive to help ensure that your credit is protected. Here are some steps you should take to improve your credit score after a divorce:
Separate or Close Joint Accounts
The best way to avoid the nightmare scenario of having to deal with a spouse’s bad debt is to reduce or eliminate your potential exposure to this hazard. The first step in accomplishing this is to get rid of as many joint credit accounts as possible. If you have joint credit accounts with no balance, contact the lender and arrange to have your spouse (or yourself) removed from them. If there is a small balance that has to be paid first and you can afford it, pay off the account so you can transition it to an individual credit account. Note that you can also work to close these accounts, but that in itself may have a negative impact on your credit.
If the account has a significant balance that you cannot afford to pay and the debt belongs to your spouse, be sure your divorce attorney is aware of the account—he or she can petition the Court to ensure your spouse is responsible for the debt and for paying it timely. You will also need to keep a close eye on any accounts like these to make sure your ex-spouse is paying on them.
Do Not Own Anything Jointly with Your Ex
You will need to take a look at various properties such as your house and any cars you own together. If your spouse is keeping any of these properties, insist that he/she refinances the loan on it to get it out of your name. If, for whatever reason, that is not possible and/or your spouse is being uncooperative, you may need to insist on selling these properties and dividing the proceeds. Either way, you do not want to enter single life still on the hook for properties that you no longer have anything to do with.
Stay Current on All Your Bills
As mentioned earlier, one of the factors that can damage your credit score more than anything else is having late payments. Even though finances are tighter after a divorce, do everything you can to keep up on all of your monthly credit obligations. This may require some creative budgeting, and you may need to cut corners to make ends meet. Just keep in mind that there is always a period of adjustment after a divorce, and things will get better over time once you are adjusted to your post-divorce lifestyle.
Open New Accounts Independently
While you are shutting down any joint accounts and doing everything you can to separate yourself from your spouse, you should also be establishing credit on your own. Even before the divorce goes through, it would be a good idea to open a bank account and take out (and timely pay off) some credit in your own name. It may be more difficult to get new credit after the divorce is finalized because of your lower household income.
Closely Monitor Your Credit Report
Keep a close eye on your credit report and watch out for any significant dips in your credit score. This is especially important if there are still some accounts with your name attached to them that your ex is responsible for paying. You are entitled to one free copy of your credit report every 12 months through https://www.annualcreditreport.com/. There are also many other services that allow you to monitor your credit score on a monthly basis—some are free, and some require a paid subscription.
Take Inventory of All Your Assets and Debts
Calculate all of your assets and debts to get a comprehensive picture of how you are doing financially. If you need a credit report or to look into your debts further, you can create an account on Experian or TransUnion for free. Keep in mind that when it comes to your credit score, 670 to 739 is good, 740 to 799 is very good and 800 and up is excellent. You should also always keep your credit utilization rate – or how much credit you use compared to how much you have – below 30% to help ensure that your score stays high.
Create a Budget
Now that you’re in a single-income household, you may need to change your attitude towards spending. For example, you could create a budget where 50% of your after-tax income goes towards your necessities, 20% goes towards savings and debt repayment and 30% goes towards everything else. You could cut back on the 30% category by making your coffee and meals at home, getting rid of cable and other subscription services and using coupons and discounts when shopping.
Don’t Make Any Big Financial Moves
Even if you get a substantial divorce settlement and suddenly have a large sum of money, it is best to save it as opposed to spending it all right away. You never know what is going to happen down the line and you want to be prepared for the worst just in case.
In order to increase your savings, you could always utilize a high-yield savings account, which will give you a higher interest rate than a regular savings account. Another option is to purchase a U.S. government bond, which also offers a higher interest rate and is a safe investment with virtually no risk involved.
Secure Employment
If you didn’t work while you were married, you may now have to find a job or go back to school to obtain more training. Either way, if you don’t have money to cover your expenses, you should find a job that will provide a decent income. Even if you do have child support and alimony coming in, you should not depend totally on this income, because you never know what might happen with your ex-spouse’s financial situation, health, or whatever.
Open a Retirement Account
If you don’t already have a retirement account in place, now is the time to start one. Check and see if your employer is providing one and if they will match whatever contributions you make to it. You can also speak with a financial advisor with your retirement account provider to learn about the types of accounts you can invest in. For example, you can contribute after-tax dollars to your Roth IRA so you don’t have to pay taxes when you cash out, or you can start a traditional IRA or 401(k) with your employer where you contribute pre-tax dollars to the account and pay taxes on it later on.
Considering Divorce in South Carolina? Contact a Seasoned Family Law Attorney
Getting a divorce is a major decision that will impact your life in numerous ways. There will be many financial consequences, among them being the possibility that your credit score will get damaged. If you are thinking about dissolving your marriage, it is best to work with a lawyer who thoroughly understands the process and how it may affect your financial situation.
At the Cate Law Firm, we are here to help! Our firm is focused exclusively on family law, and we work closely with our clients to provide strong legal guidance and moral support during this difficult time.
To schedule a consultation with an attorney, call us today at 864-251-5855. You may also message us online or stop by our Spartanburg office in person at your convenience.
Cate & Brough, P.A.
