Divorce can affect your credit score as well as every part of your life and the lives of your family. Finances are no exception. When you decide to get divorced, it’s important to prepare for the effects it will have on your credit score. From dividing bills to refinancing the mortgage, your credit will be put to the test before, during, and after a divorce.
Your credit scores are important because you may need to qualify (or requalify) for debts such as auto loans, mortgages, or even your credit cards. If you’re moving out of your home and into an apartment, the landlord may check your credit as well. Knowing how to divorce can affect your credit score during can help you remain financially stable once you’re on your own.
Here’s how divorce can affect your credit score.
Making payments on time is the most important factor in many credit scoring models, making up 35% of your FICO scores. Paying bills on time shows lenders that you’re likely to pay back debt in a timely and predictable manner, without having to be reminded. Late or missed payments can signal that you aren’t on top of your financial obligations.
When you work with your soon-to-be-ex on dividing up any accounts and negotiate who will continue to pay which bills, make sure someone is paying them. Shared expenses such as those for a child’s education can be overlooked if both parties think the other will pay the bill. Communication is key. If you’re dividing a joint bank account into two new accounts, be sure to update any auto-pay bills with the new information so they don’t try to draw from a non-existent account.
If you and your spouse are separated and considering divorce, you may want to discuss the possibility of refinancing your joint debts into individual accounts with a financial professional, which can help to avoid complexities later down the road. For example, removing a spouse as an authorized user on a credit card account will ensure your personal credit scores won’t be damaged if your spouse misses a payment on his or her card.
Amounts Owed (Credit Utilization)
A large factor in credit scores is the amount of debt you’re carrying relative to your credit limits. If you have a total credit limit of $5,000 and you are carrying $2,500 in debt, your credit utilization is 50%. The lower this percentage, the better.
Divorce can affect your credit utilization for a number of reasons. You may be burdened with more debt when dividing assets and liabilities, raising the total amount you owe. You may incur legal fees, and if you finance them on a credit card, you’ll increase the amount as well. If you refinance your credit card with only one source of income, your credit limit may be reduced. Plus, closing joint credit cards or losing authorized user privileges on your spouse’s credit account can cause your credit limit to drop and your utilization to rise.
Stay on top of your budget as you prepare to live without the income of your spouse. Carrying a large balance on your cards while dealing with lower credit limits can cause your utilization ratio to grow quickly, decreasing your score significantly. Consider applying for a new card or asking your current issuer for a credit limit increase in order to make this transitional period easier on your finances.
Length of Credit History
Lenders want to see that you have a history of paying debts on time. In general, the older the average age of your accounts, the higher your scores will be if all other factors remain constant.
Closing older joint accounts can lower the average age of your accounts. Likewise, when refinancing joint debt under one person’s name, your lender will likely stop reporting on the original account. They’ll only report the age of the refinanced account, which can reduce the age of your credit history when the original account falls off your credit reports. Credit history is linked to the account holder and authorized users, so if your accounts are switched to your spouse’s name only, you may miss out on credit history after you split.
New Credit Inquiries
When you apply for a loan or credit, the lender will pull your credit reports. This “pull” is called a hard inquiry, which is a normal part of the process and can lower your scores by a small amount. If you have a short credit history or more than about 4 hard inquiries in a year, you can hurt your scores more.
Expenses can add up during a divorce. Legal fees or the expense of a new living situation may tempt you to apply for new credit cards in order to get by. Applying for multiple cards in a short amount of time can hurt your scores and signal to lenders that you’re a riskier borrower. If you need to find a new card after your divorce, research the best card for your spending habits before applying, and try to limit your applications to once every few months.
If you refinance any debt under your name during the divorce, consider shopping around for a lower interest rate. For auto loans and mortgages, inquiries within a short period are grouped together and not treated as separate credit pulls.
Types of Credit
When lenders look at your credit history, they often like to see history for multiple kinds of accounts, like loans and credit cards. While this factor is only 10% of your FICO scores, it’s still important to have a diverse credit profile. A healthy mix of debt between revolving credit (credit cards) and installment credit (home or auto loans) ensures your debt portfolio is varied. If you give up joint debt to your spouse in the divorce, you’ll lose that account from your reports.
Tips to Protect Your Credit During a Divorce
⦁ Make an agreement on which bills each party will continue to pay before, during, and after the divorce.
⦁ Negotiate any shared debt you and your spouse are willing to divide up. This can be a painful topic, especially if you disagree on who is responsible for which debts.
⦁ Use credit cards responsibly and avoid adding on more debt during or after the divorce, which can hurt your credit utilization.
⦁ Negotiate with your lender when refinancing or requalifying for a loan to see if they can use the original date of the account instead of the date you refinanced.
⦁ Avoid applying for too many cards at once, and know how credit inquiries affect your score.
A Few Things to Keep in Mind
Only joint credit or loan accounts affect both of your credit scores. Joint checking accounts do not appear on your credit reports, but it’s still a pain to divide assets and open new accounts separately.
Depending on your issuer, you may need to pay off the balance on any joint credit cards before closing the account. Legally, both parties are responsible for debt on a joint account, regardless of who charged it. If one partner is an authorized user, the primary account holder is legally responsible for the debt.
Divorce can affect your credit score and be a major strain on your finances. Learning the ins and outs of your credit scores will better prepare you to safeguard your credit through the divorce process, positioning you for stability moving forward.
Greg Mahnken is a Credit Industry Analyst at Credit Card Insider. He strives to teach people how to use credit to their advantage. www.creditcardinsider.com