There are many logistics to consider while going through a divorce. One of them is separating the finances.
While getting a divorce doesn't directly hurt your credit score, it's common for people to find themselves in trouble with their credit after a divorce because many of the financial dynamics that you're used to change drastically.
You may find yourself figuring out how to pay bills with less money than you had with combined incomes, managing debt that was previously shared and possibly taking on new loans such as a mortgage or auto loan. These changes could indirectly impact your credit score for a period of time.
If you're facing an uncertain time with your finances, be encouraged. There are ways to rebuild your credit and feel empowered to plan out a positive financial future for yourself.
In this article we'll cover:
- How divorce affects credit for both spouses
- How creditors view divorce
- How to protect your credit score during a divorce
- 4 tips for rebuilding your credit after a divorce
How divorce affects credit for both parties
Here are a few ways that divorce can affect the credit of both spouses.
Following a divorce, you're likely facing a change in income. You may be going from two incomes to one, and adjusting to making alimony, child support or other payments that you didn't have before. This change in monthly income may affect your ability to make payments on time and in full for a period of time.
Missing payments on joint debt
Joint accounts are reported on both spouses' credit reports, so if one defaults, the other will be affected. This includes credit cards, mortgages and any installment loans. Whether bills get paid or not, those joint accounts stay on your credit report.
There's also the possibility of new debt being added by one or both spouses without the other one's knowledge.
Closing joint credit cards
When you close a joint credit card, you may want to consider several implications.
First, your credit utilization ratio may increase. Credit utilization is the percentage of your total available credit that is being used at any given time. If you close one credit card but still have others open with outstanding balances, your percentage of available credit is lower than it was before and your credit utilization ratio is higher.
Be aware of how much available credit you have left and don't max that out. Keeping a ratio of 30% or lower may help to maintain a good credit score.
Secondly, if you were a spouse that relied on the good credit standing and consistent payments made by your ex-spouse, closing a joint credit card may negatively affect your credit score. You're now solely responsible for paying off any remaining debt in your name, as well as your own credit history.
Creditors and debt collectors don't honor divorce decrees
At the end of your divorce proceeding, the judge will issue a divorce decree. This is a judgment that sets the terms of community property shares and debt responsibility, along with orders for alimony or child support. Your creditors are not obligated to honor divorce decrees.
How do I protect my credit score amid a divorce?
The best first steps to ensure that you have good credit after divorce is to pay off and close all joint accounts. Additionally, if your ex-spouse is an authorized user on any credit cards, you as the primary user may remove them from the account.
You may also want to consider freezing your credit report, which prevents anyone from opening a new account in your name. It also prevents credit bureaus from sharing your credit report with any third parties, such as new lenders. This may give you an opportunity to get your finances in order before taking on any new loans or credit cards. When freezing your credit, be sure to do so at all three major credit bureaus — Experian™, Equifax® and Transunion®.
4 tips to rebuild your credit score after a divorce
1. Resolve join debts and pay it off
Ideally, you and your ex-spouse can figure out how to divide up the debt that was built while you shared a joint account. Monthly payments that were affordable when you had two incomes may become harder to do on your own. Late or unpaid payments could impact your ability to get approved for credit cards, loans or mortgages in the future. Dividing up this debt could be helpful to each spouse so that neither of you takes on enough debt to damage your credit score.
2. Monitor your credit report
It's a good idea to monitor your credit report and credit score frequently so you know exactly what you're financially responsible for, according to lenders. Remember, the primary account holder named on the account is responsible for the bill regardless of who actually spent that money.
If you'd like help monitoring your credit, you can sign up for the Chase Credit Journey® — a free resource to help you through the process of managing your credit.
3. Keep credit utilization ratio low
While your finances are in flux, try to avoid maxing out your credit line. You'll want to get your credit utilization ratio to under 30%. This means only spending 30% of your total credit. For example, if you have a credit card with a limit of $10,000, aim to spend no more than $3,000 on that card within any monthly billing cycle.
4. Start to build a credit history of your own
You can work to establish a credit history of your own by applying for a credit card in your name, making small purchases each month and paying them off in full. Establishing a history of consistent payments can increase your credit score over time.
If you've only been an authorized user on your ex-spouse's credit cards and don't have credit cards or loans in your own name, once you're removed from their accounts, your credit score may be negatively affected.
Although divorce is a life event that can impact your finances significantly, it doesn't necessarily hurt your credit score. You'll want to consider the more indirect ways that divorce may affect your credit, such as closing joint accounts you may have relied on, taking on debt that was once shared and adjusting to a new and possibly lower income for a time.