By Lyle Solomon, Principal Attorney
Divorce may be challenging and emotionally exhausting for many people. Making separate living arrangements, dividing joint finances, and ending a once-happy marriage is a difficult process to go through. Protecting your credit score during a divorce is crucial for those going through one.
People frequently neglect their credit when going through a divorce. Unfortunately, this is a fatal error – your credit scores may suffer during a divorce.
Here are a few professionals tips on protecting your credit score during a divorce.
How Does Divorce Affect Your FICO Score?
Changes in your marital status do not affect your credit score. This is because your credit report does not disclose your relationship status. However, managing joint accounts with your ex-spouse could impact your credit reports.
Here are a few scenarios when a divorce can affect your credit score.
Defaulting on Joint Debts
Experiencing a divorce can be emotionally taxing. As a result, it may be easy to overlook paying a credit card or auto loan installment. You may unintentionally forget to make a payment on whatever debt you and your spouse shared.
Couples acquire joint debts such as mortgages, vehicle loans, and credit cards after marriage. A court declares who will be accountable for making specific debt payments during a divorce settlement agreement. However, in the eyes of a creditor, even if your husband receives instructions to make payments on your joint credit card, you are both still liable for it because credit was granted to you both.
Many people mistakenly believe that because a judge gave their spouse liability for some joint debts, they no longer need to pay them. Your credit score may still be impacted if your spouse misses a payment while the debt is still included in your credit record.
You will also be liable for the debt if your ex-spouse makes a lot of transactions on a joint credit card account. In actuality, even if all payments are made on time, a high credit use rate on a common credit card may harm your credit ratings and your exes.
It’s crucial to constantly be aware of what information is on your credit report. Whether or not you are going through a divorce, you should check your credit report and credit score. This will assist you in determining which credit cards and loans are in your name, as well as any potential missed or late payments.
It’s an excellent idea to make the minimum payments on time after you know what information is on your credit report.
Many people get vindictive following a divorce and refuse to pay for debts they share with their spouse. Ensure you always make the required minimum payments. Otherwise, you may jeopardise your credit.
Closing Joint Credit Card Accounts
Whatever your marital status, closing a credit card can affect your credit utilization ratio. Your total amount of available credit decreases when you close an account.
Let’s imagine you have two credit cards with a credit limit of $10,000, giving you a total of $20,000 in available credit. Using $5,000 on a single card will only consume 25% of your available credit. However, if you cancel one card, you’ll only have $10,000 in accessible credit. Your utilization is now 50% despite not spending any more money, and a greater utilization will harm your credit score.
Couples who have decided to part ways don’t want to keep their joint credit cards when they separate. Just know that cancelling a common credit card could decrease your credit score because of the potential influence on your credit use.
Your ex-spouse removes your name as the authorized user
Being an authorized user on your husband/wife’s credit card can help your credit score even if you don’t need to pay their credit card bill, provided that they use it consistently and adequately make on-time payments. This can be extremely helpful for a spouse who didn’t previously have any open accounts on their credit report.
However, your credit use may be damaged, and your credit score may drop if you can’t use your spouse’s credit card(s).
Tips to Protect Your Credit Score During a Divorce
Each divorce is unique. Regardless of gender, it can be difficult to untangle your credit obligations from your ex-spouse. In the end, it’s up to you to make an effort to protect your credit during a divorce.
To stop a vengeful ex-spouse from opening phoney accounts in your name, freeze your credit reports with all three credit bureaus.
When possible, work with your ex to divide any joint accounts. If you have a combined mortgage, the spouse who is maintaining the house might refinance the debt into their name alone. Selling the assets and using the proceeds of the sale to settle other joint debts is another possibility with joint loans (such as mortgages and auto loans).
Create a personal bank account. Consider creating new checking and savings accounts with an online bank to safeguard your finances. Online banks provide convenience and offer better savings interest rates than traditional banks. Capital One’s online savings account has no minimum balance requirement and offers ten times the national average interest rate on all balances.
To avoid the hazards of a vengeful divorce, keep a polite relationship throughout the divorce process. The best action is to pay off your debts before filing for divorce. You can take out a short-term debt consolidation loan to clear your debts. Or, both of you can settle debts with creditors.
Try to convert an account to an individual account if paying off or closing it is not an option. You should explore your choices by getting in touch with each creditor.
Also, check with the lender to ensure your spouse is not listed as an authorized user. Even if you believe an account is in your name alone, make sure their name is taken off.
The most crucial thing is ensuring that payments are made on time while your name is on a joint account. This will help you make a clean break from your financial obligations without risking them following you long after the divorce is official.
It’s wise of you to want to preserve your credit, especially during a significant life transition. Monitoring your credit reports periodically is one way to keep your credit safe. The three credit reporting agencies can get a free credit report every 12 months. By doing this, you can maintain good credit and prevent unpleasant surprises as you move into a new phase of your life.
Credit damage following a divorce might occasionally be unavoidable. It could take time to recover financially if you’ve been a stay-at-home parent, and you must find work immediately. However, your creditors won’t wait for your payments.
Your credit may suffer through missed payments, delinquent accounts, and collections. In extreme circumstances, you might need to file for bankruptcy during or after a divorce.
Here’s good news for you if your divorce has caused you credit damage: over time, you can rebuild your credit. If possible, you should try to safeguard your credit throughout a divorce. However, if the worst should happen, you should know that you don’t have to live with damaged credit for the rest of your life.
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.