How Does Divorce Affect Your Credit?
Divorce is a difficult time for most people. On top of it, some may also get the unpleasant surprise of suffering from a major blow to their credit scores. Luckily, there are certain steps you can take to help protect yourself and your finances from suffering from divorce proceedings. Keep reading to learn what you’ll need to know and how you can remain financially secure.
Does Divorce Hurt Your Credit?
Divorce and credit problems tend to go hand in hand. This is because most couples have many shared accounts together. Does divorce hurt your credit? The answer is yes, it very well may affect your credit.
During your divorce process, the court will issue what’s known as a divorce decree. This is a decree that specifies how your joint assets will be divided. This includes everything from a wedding loan to a mortgage.
Here are some ways credit bureaus and creditors view divorce:
- Debt collectors don’t necessarily believe they need to honor divorce decrees
- If your partner doesn’t repay a loan that you both took out together then your credit will still suffer, despite you two no longer being married
- While divorce decrees detail who’s responsible for what, they don’t have the power to break contracts with lenders
How Can Divorce Indirectly Hurt Your Credit?
If you’re getting divorced, you’ll want to keep a close eye on your credit utilization rate. This is the way through which divorce may indirectly impact your credit and affect your credit history moving forward. This is a rate, sometimes referred to as a ratio, that represents the amount of revolving credit that you’re using. It’s divided by the amount of credit available to you. To put it more simply, your credit utilization rate is equal to what you currently owe divided by your specific credit limit.
What does the credit utilization rate have to do with your divorce?
- If your former partner is the one responsible for submitting payments on a joint account and doesn’t do so on time, the delayed payment will show up on your credit reports
- This, in turn, may cause damage to your overall credit score and cause you to go through the arduous process of having to rebuild credit
If you and your former partner have a high credit utilization rate on a credit card you jointly share, then it could still affect your credit score. Moreover, it’ll negatively impact your score, even if the payments are made promptly.
You’ll need to work out a method that’ll protect the credit scores of both parties. However, this might be difficult if the divorce wasn’t amicable or if your partner wants to take vindictive measures against you.
Being aware of how divorce affects credit is a crucial step in solidifying your independent financial health.
Why Women May Be At A Disadvantage
Women might be at a disadvantage when it comes to divorce and their credit scores. The Equal Credit Opportunity Act (ECOA) forbids lenders from discriminating based on religion, race, age, and gender. Although, women still tend to suffer lower credit scores after a divorce than men do.
How can this be? Consider the following:
- Historically, women on average earn less than their male counterparts
- Therefore, women tend to report less household income than their partners or ex-partners
- As a result, women’s credit scores are more likely to decline during their marriage
- Many women also report their ex having ruined their credit score
A woman who spends a large amount of her savings on divorce will be in a considerably less stable financial place than her ex who may earn more than she does.
If the ex was the primary breadwinner, then the new reality of covering bills, loans, and other payments may be overwhelming on a dramatically cut monthly budget. These issues can cause late payments, reliance on credit cards, and other issues that’ll rapidly lead to a decrease in your credit score.
How To Manage Your Credit Effectively During Divorce
Going through divorce proceedings can be an incredibly difficult and emotionally trying time. Being stressed and overwhelmed isn’t typically a good recipe for making smart financial decisions. Consider the following to help you manage your credit effectively during a divorce:
- Cooperate and work together to close joint accounts, if possible
- Use the proceeds generated from the disposal of any joint assets to retire other joint debts
- As soon as you can, close any joint credit cards and ensure the cards are only in your name. Additionally, ensure that you’re the sole authorized user
- Open a bank account in your name only and protect any new finances
- Reach out to the three credit reporting agencies to prevent an ex who might try opening fake accounts in your name
If you’re going through a divorce then make sure to proceed with caution when it comes to your finances. Read and learn more about how your finances could be affected. Moreover, be proactive in taking every precaution you can to protect yourself and retain good credit after divorce.