Divorce can bring significant financial challenges along with emotional turmoil. Managing your finances and credit during and after a divorce can be complex. It becomes even more difficult if your credit takes a hit post-divorce. Here’s how divorce can affect your credit and steps you can take to protect or rebuild it.
How Divorce Can Impact Your Credit
Divorce often leads to financial strain due to losing one source of income, which can result in missed or late payments on loans, credit cards, or bills. Since payment history is crucial in determining your credit score, any missed or late payments can negatively impact your score. Even if a judge orders one spouse to make payments on jointly-owned debts, failure to pay will affect both parties’ credit reports. The original loan or credit card arrangement remains effective regardless of the divorce decree.
Steps to Protect or Rebuild Your Credit Post-Divorce
1. Adjust Your Lifestyle and Budget: Adapting to a lower income post-divorce is challenging but essential. You may need to move to a less expensive home, refinance, sell your car, or re-evaluate your spending habits to match your new financial reality.
2. Close Joint Accounts: Start separating your finances from your spouse’s as soon as divorce is imminent. List all joint accounts and cancel them by phone and in writing, instructing creditors not to re-open them.
3. Monitor Your Credit Score: During the divorce process, obtain and review your credit report thoroughly. Close joint credit card accounts to protect your credit score from negative consequences of your spouse’s spending.
4. Get a Credit Card in Your Name: Adjust to a single income by getting a credit card in your name. Apply while still married, if possible, to use your spouse’s income to meet the credit card company’s requirements.
5. Review and Correct Your Credit Report: Get your free annual credit report from annualcreditreport.com. Verify all information and report inaccuracies to the credit reporting agency immediately. Watch for signs of fraud or identity theft.
6. Remove Your Spouse as an Authorized User: Prevent your spouse from incurring debt for which you are liable by removing them as an authorized user on your credit cards.
7. Obtain Sole Ownership of Debts: Transfer credit card balances and refinance debts to gain sole ownership. Make minimum payments on accounts affecting your credit while waiting for the court’s final ruling.
8. Learn Money Management: If you previously relied on your spouse for financial management, now is the time to learn. Stick to a budget to track income and expenses, and avoid late fees by paying bills on time.
9. Pay Down Debt and Keep Balances Low: Work aggressively to pay off credit card debt and keep balances low to maintain a healthy credit utilization rate.
10. Increase Your Income: Look for additional income sources, especially if you have children to support. Enhancing your income helps avoid borrowing and the accompanying interest payments.
11. Pay Bills on Time: Always pay bills on time to maintain a good credit score. Understand who is responsible for which debts post-divorce to avoid missed payments.
Understanding Divorce’s Indirect Impact on Credit
While filing for divorce doesn’t directly affect your credit score, the financial decisions made during and after divorce can. Shared property and joint accounts mean that your credit can still be impacted by your ex-spouse’s financial actions.
About the Author
Lyle Solomon has extensive legal and consumer finance experience. A member of the California State Bar since 2003, he graduated from the University of the Pacific's McGeorge School of Law and works as a principal attorney for the Oak View Law Group in California.
Work with a Certified Divorce Lending Professional (CDLP®)
Do you have questions about how divorce may impact your ability to obtain mortgage financing? A Certified Divorce Lending Professional (CDLP®) can help make the transition smoother and more successful for all parties involved. Incorporating Divorce Mortgage Planning into the divorce settlement can help both spouses obtain new mortgage financing post-divorce.
Contact a CDLP® today for a copy of the Divorcing Your Mortgage Homeowner Workbook, a guide to credit, real estate, and mortgage financing after divorce. This workbook will help you get organized, be prepared, and understand your mortgage financing position, whether you need to refinance the marital home in an Equity Buy-Out situation or prepare to sell and purchase a new home post-divorce.
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