Going through a divorce is incredibly stressful, especially if you’re worried about your finances. Most people want to know if divorce hurts your credit.
Divorce could affect the creditworthiness of both partners, but the impact depends on your financial circumstances as well as the details of your divorce agreement. Being aware of the possible impact of divorce can help you limit any damage to your credit score.
What Happens to Credit Card Debt in a Divorce?
It’s not uncommon for angry spouses to go on a vengeful shopping spree with credit cards. But even if your divorce is civil at the moment, you still need to take these steps:
- List your accounts. Make a note of joint accounts, credit cards that include you as an authorized user, accounts that you solely own but that list your spouse as an authorized user, and accounts that you have just in your name.
- Close joint accounts. Credit card issuers do not take your divorce into consideration. You have a contract with them, and as account owners, you’re both legally responsible for paying off debt. If you need the credit card, ask your issuer if you can open a new credit card under just your name. The success of this strategy depends a lot on your own creditworthiness.
- Remove your spouse’s authorized user status. The account owner is liable for paying the balance off. But an authorized user can hurt the credit of the account owner. Remove your spouse as an authorized user. If you’re an authorized user on your spouse’s card, ask to be removed.
- Pick a debt-elimination strategy for your accounts. For the credit card accounts that you own, it’s your job to pay it off. The amount won’t change with a divorce, but paying down your debt will elevate your credit score. If your spouse ran up debt as an authorized user, ask your spouse to pay you back. That might not work, but it doesn’t hurt to ask.
- Decide how to pay off debt on joint accounts. You’re both liable for the debt, so come to an agreement about how much each of you should pay. Some split it down the middle, but others can identify who incurred what expense.
- Find out how your state handles debt in divorces. This is where it pays to have a good lawyer. States vary in how they view debt by divorcing couples. As you decide how much you each need to pay, consult with your lawyers so you follow the law. This step also nudges a spouse who is reluctant to pay his or her share of the debt burden.
How to Manage Your Mortgage During a Divorce
Being a homeowner complicates divorce, but the situation can be managed effectively. Your options depend on whether you want to sell the home, let your spouse buy out your portion of the home’s equity or stay in the home by yourself.
Refinancing the mortgage is a good solution if one of you wants to remain in the home. The new mortgage would have either your name or your spouse’s name. The person remaining in the home would need a good credit score and sufficient income to get approved for a mortgage.
If there’s home equity, the one who will seek a new mortgage can apply for a cash-out refinance. This means the spouse who’s no longer on the mortgage (or title) can receive a fair share of the equity.
If neither you nor your spouse qualify for a mortgage on your own (or neither of you wants to stay in the home), then you may need to sell it. Do get advice about taxes as well so you don’t get unpleasant surprises when it’s tax time.
How Divorce Affects Your Credit Score
The good news is that credit score algorithms don’t consider income or marital status. But if you have credit card debt, there’s a possibility that your score could be impacted.
If you split up the debt, you’ll be making payments based on your salary alone. Unless you have sufficient income, this could mean an increase in your balances since you’re paying compound interest. This causes your credit utilization ratio, which is the amount of credit you’ve used compared with the amount you have available, to increase. This situation can decrease your credit score.
Also, by closing some accounts, you could decrease the amount of credit you have available, which increases your ratio and, in turn, decreases your credit score.
It’s not impossible to get a divorce and have minimal impact on your credit. But it depends on the divorce agreements and any credit card debt that you need to begin paying for on your own.
How Divorce Affects Your Credit Report
Your credit report doesn’t show your marital status, so your divorce isn’t listed in your report, either. What will change is the number of active accounts.
If you closed accounts due to the divorce, they’ll still appear on your credit report for up to 10 years. So the accounts still get included in the average age of your credit history, which is 15% of your FICO score.
As already mentioned, you do lose the available credit that was associated with the accounts you closed. That can lower your score if it increases your credit utilization ratio past 30%.
Ways to Build Your Credit History
If you find yourself with little credit in your own name, there are steps you can take right now to remedy that situation.
- Pay all of your bills on time. Payment history is 35% of your FICO score. Do what it takes to make timely payments, such as setting up automatic payments, email reminders or text alerts.
- Open a new credit card. Decide what type of rewards you need going forward. You’ll most likely have different needs as a single person in a new living situation. The added benefit is that if you previously closed accounts, this helps you replace the lost credit. So it’s also a step toward improving your credit score.
- Keep low credit utilization ratios. If you have a ratio in excess of 30%, your score will suffer. To really boost your score, keep it under 10%. Credit scores consider your ratio on each individual card as well as the total ratio across all of your cards. So you can’t rack up debt on one credit card because that will still impact your score.
- Get a secured credit card. If you can’t qualify for an unsecured card, apply for a secured credit card. This involves making a deposit in an account to secure the card. This decreases the risk for the credit card issuer. Use the card responsibly and you’ll build credit. When you’re ready to advance to an unsecured credit card, you’ll get your deposit back.
- Check out a credit-builder loan. If your divorce has led to a credit catastrophe for you, such as a bankruptcy, it may be difficult to get a credit card right away. Consider getting a credit-builder loan as a steppingstone to a secured credit card. These loans vary by banks and credit unions, so read the terms carefully to know how a particular loan works and what’s required of you. It takes time to build great credit, but you’ll get there.