The process of going through a divorce can take a toll on your physical and mental health. It can also disrupt the other aspects of your life, such as your living arrangements, finances, job or business, your family, and the list goes on. While dealing with all of this, you might wonder what happens to your credit. We’ve put together some helpful information in this blog to hopefully answer some of those questions.
Although divorce won’t directly affect your credit score, it can suffer due to indirect results of how you and your spouse manage your finances after getting a divorce.
What happens to your credit following a divorce?
A change in your marital status doesn’t affect your credit score, but a challenging financial situation does.
Whether you miss paying your bills on time due to overall low income or debt, there are a few things you should be aware of regarding what could happen to your credit post-divorce.
Joint accounts will remain on your credit reports.
Despite getting divorced, you and your ex-spouse will still be responsible for repaying debts on any joint accounts you may have, which will continue reflecting on both of your credit reports.
You may have all or any of these types of joint accounts.
1. Joint mortgages
It can be challenging to deal with mortgage accounts. One option is to refinance the mortgage into the name of the spouse, who is going to keep the house if they qualify for a loan independently. The second option is to sell the house and split the profit if neither of you can afford to take on a mortgage individually.
2. Joint credit cards
It is best to settle all your credit card debt before finalizing your divorce. Either you can pay off the joint accounts together or divide the debt and transfer the balances to new credit cards in each of your names.
3. Joint auto loans
If you share a joint auto loan with your ex-spouse, it is best to refinance the loan in the name of the spouse, who is going to keep the car.
A divorce decree won’t void lender contacts.
The court will issue a divorce decree when you’re getting a divorce, assigning the division of your marital assets and debts between the both of you. It records who is responsible for different debts and those debts that remain shared.
The challenge is that a divorce decree doesn’t matter to creditors as they are not mandated to follow it when it comes to collecting debts. Your credit will still be on the line even if a judge declares your ex-spouse responsible for paying off a joint account.
If your ex-spouse makes late payments or doesn’t pay at all, that negative information will show up on their credit report and your credit report as well.
Different ways a divorce can indirectly impact your credit score.
A change to your credit mix, expensive attorney fees, inability to pay, age, and declining health are just a few indirect effects of a divorce. Here are a few other things you might have to face after getting a divorce.
Divorce can be expensive, which could set you back.
Getting a divorce isn’t cheap, with the average cost of divorce being $12,900. It is critical to be aware of the fees and expenses associated with the court proceedings during a divorce.
Your expenses will vary depending on different factors of your divorce that include:
- Your resident state.
- The cost of your attorney.
- Child support or child custody (if applicable).
- Whether or not you need to pay alimony or provide financial support to your ex-spouse after divorce as per the court’s order. (Take note: Late alimony payment will reflect in your credit report, potentially damaging your credit score.)
- Whether or not you need to take your divorce case for a court trial.
Joint credit accounts could damage your score.
A divorce doesn’t exempt you from your responsibility of paying for the joint accounts that you have with your ex-spouse. If your ex-spouse misses even one payment, it’ll still be tied to your name and reflect on your credit report despite you making all the payments on time.
All the activities on your joint accounts will continue to be reported to the credit bureaus and show up on your credit report. Any late payment will cause you to drop your score because payment history accounts for 30% of your credit score.
You may not be able to pay your bills.
Divorce can be difficult, causing you to get stuck in a vicious cycle of debt. Miscellaneous costs other than your divorce expenses may push you to the brink of becoming broke and leave you helpless with your bill payments. Missed payments are highly likely to cause a drop in your credit score.
Your credit utilization ratio could suffer.
Even if you manage to make all your payments on time, your reduced income as a single person could make you heavily dependent on your credit cards to finance your lifestyle. The amount of credit borrowed compared to your maximum credit limit makes up your credit utilization ratio, a crucial component of your credit score.
You may end up spending beyond your credit limit if you go on supplementing your expenses with your credit cards, which can increase your credit utilization ratio. If you aren’t mindful of how much credit you’re borrowing, it can damage your credit score.
Your credit age could alter.
Your credit age accounts for 15% of your score, crucial to your overall credit. But what is credit age? Credit age refers to your credit history, containing all the details of your credit activities over the years.
The credit bureaus like to see a higher credit age since it helps them get a better overall view of your credit history and behavior.
You’ll end up with a lower credit age if you refinance your ongoing debts or take out new loans with your ex-spouse’s name attached to them.
Your credit is likely to take a hit if you previously had joint accounts with your ex-spouse that aren’t a part of your credit history anymore.
Your credit mix could alter.
Your credit mix refers to the various credit accounts tied to your names, such as auto loans, credit cards, and mortgages. Your credit mix makes up for 10% of your credit score.
Credit bureaus favor those with a higher mix of credit accounts, which is possible when you handle them responsibly.
You may find yourself with a lower credit mix following a divorce because restructured credit accounts typically leave you with fewer accounts to your name than when you’re married.
Even though the impact of your credit mix on your credit score may be minimal, the financial burdens associated with divorce can put you in a tight spot, requiring you to get all the help you can to maintain a good credit score.
It is good to be watchful when managing your credit after a divorce. Remember, you don’t need to live with a damaged credit score forever. Get professional help from a credible credit restoration company like CoolCredit, the easiest way to fix your credit.
Get started with your credit repair journey today by scheduling a free consultation with Cool Credit.