Divorce can affect your credit score, but only indirectly. When divorcing, situations such as missed payments, account closures, or higher-than-usual credit card balances may occur as a result of the divorce, which can lead to a decrease in your credit score.
What affects your credit score during divorce?
Your credit score (which reflects your creditworthiness) depends on a range of factors including any debts you have, how reliable you are at repaying debts, how long you’ve had credit, and the types of accounts you have open. The higher your credit score, the less risky lenders consider you; this means you may be eligible for lower interest rates or more favorable terms on any debts you incur.
So, what affects your credit score when you and your spouse decide to separate? While each case is different, there are some common circumstances related to divorce that may affect your credit score.
Account closures
In the event of a divorce, it may be wise to close any shared accounts you have with your spouse. However, if most of your credit is based on joint accounts, your credit score may decrease. This happens because your credit score is affected by the number of accounts you have open, your credit history, and the different types of accounts you maintain. For example, credit history affects 15% of your credit score. So, if your oldest account is an old joint credit card spanning decades, you will lose that history when it is closed, and your credit score is likely to be affected.
The same applies to a home loan, auto loan, and any other debts you may have. Paying off or closing these accounts can limit the array of active loans you have, which might also impact your credit score.
Missed payments
Debts incurred during the marriage may be considered shared property depending on the laws of the state you live in. In the case of community property law, a judge may order one spouse to pay the shared debt that was agreed upon.
However, as long as your name is on the account, you are responsible for the debt. This is true for joint accounts, even when you are separated or divorced, as the divorce decision does not change the contract you entered into with the lender when you took on the debt.
According to Michael Bender, a partner at Gray Law Group in California, such a situation may occur when one spouse moves out of the family home during the divorce process.
“They think they no longer live there, so they don’t need to make payments on the mortgage anymore. But the other spouse can’t afford the payments on their own. This will be reported to both spouses and we will see it has an impact”, according to Bender.
Important: You can remove your name from the title of the car or home but remain responsible for repaying the auto loan or mortgage. Your obligation can only be ended if your lender legally releases you from repayment or if your ex-spouse refinances the loan without your name on the new loan agreement.
Increased debt
The cost of divorce starts at $7,500, although this figure may vary depending on where you live and whether you need a lawyer. Not many people can bear this cost without it affecting their financial situation. If you have to finance part or all of your divorce, the increasing debt may impact your credit score.
Remember
Also remove your former spouse as an authorized user from your credit cards. The difference between a joint cardholder and an authorized user is that the authorized user is allowed to spend using the credit card but may not be responsible for paying off the balance.
How to Protect Your Credit Score During Divorce
There are several measures you can take to ensure your credit score does not decline during or after the divorce proceedings.
Check Your Credit Report
Everyone is entitled to a free annual credit report. The scores and accounts on your credit reports may vary among the three major credit bureaus: Equifax, TransUnion, and Experian. Requesting your credit report will allow you to see the information each bureau holds. It will also enable you to identify any joint accounts or accounts where you are listed as an authorized user so that you can address them accordingly.
Close Joint Accounts
While this may lead to a drop in your credit score, it is also important to close joint accounts. You do not want to be liable for purchases made on a shared card, especially if you are no longer in communication with your former spouse.
Review Your Monthly Expenses
Whether you are struggling to pay divorce costs or not, it may be a good time to conduct a thorough check of your financial health. Understanding your monthly budget, income, and expenses will give you a better picture of your financial situation and highlight areas for improvement.
Cutting back on some non-essential costs, even temporarily, may help alleviate the financial burden of divorce. This may allow you to focus on paying down some of your debts. The good news is that budgeting will not only help you reduce your debts but will also set you on a path to saving and investing for your goals.
Continue Making All Payments
It may seem unfair to pay for purchases you didn’t make or places you no longer live, but the important thing is that missed payments can significantly impact your credit score. For example, the amount owed constitutes 30% of your credit score, while payment history represents 65% of the weight of your credit score.
Continue making those payments to prevent your credit score from being affected. Be sure to keep paying even if your name is not on the account, to ensure your credit score is not impacted.
Frequently Asked Questions (FAQs)
Does divorce ruin your credit score?
Divorce does not automatically affect your credit score, but the circumstances arising from divorce may. You might see an impact on your credit score due to account closures or increased debts, especially if you experience financial difficulties as a result of the divorce. Missed payments may also lower your credit score, so you should continue to make all payments and monitor your credit report regarding accounts in your name.
What happens to loans during divorce?
You still remain responsible for any debts incurred during the marriage. While you may choose to refinance or pay off your loans, you must ensure that no payments are missed. If the loans are in only one partner’s name, you should check individual state law to see if you are both liable for the payments.
How can I repair my credit score after divorce?
Repairing your credit score after divorce is similar to repairing it at any other time. There are several steps you need to take, and the path you follow will depend on how low your credit score has dropped. In general, you should catch up on late payments, pay off any revolving accounts you have, make all future payments on time, and build your credit profile.
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Sources:
Equifax. “What is a Good Credit Score?”
myFICO.com. “What’s in my FICO Scores?”
Utah State Courts. “Debt Division—Division of marital debts.”
Consumer Financial Protection Bureau. “I am divorced and getting calls about a debt that is no longer my responsibility under the divorce decree or property settlement agreement. Can a debt collector try to collect this debt from me?”
Lawyers.com “The Cost and Duration of Divorce.”
Consumer Financial Protection Bureau. “Check your credit.”
California Courts Self Help Guide.”Property and debts in a divorce.”
Source: https://www.thebalancemoney.com/does-divorce-affect-your-credit-score-7092155
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