What Impacts Your Credit Score During a Divorce?
Your credit score (which reflects your creditworthiness) is a number dictated by a variety of factors, including any debt that you have, how reliable you are at making payments, how long you’ve had credit, and what types of accounts you have open. The higher your score, the better. Credit scores range from 300 to 850, but a good credit score is somewhere between 670 and 739. When you have a higher credit score lenders view you as lower risk; this can mean that you’ll be eligible for lower interest rates or more favorable terms for any debt that you take on. So, what affects your credit score when you and your spouse decide to go your separate ways? While every situation is different, there are some common divorce-related circumstances that may impact your credit.
Closing Accounts
When you divorce, it may be a good idea to close any joint accounts that you have with your spouse. However, if most of your credit exists based on joint accounts, your score may end up dropping. This is because your credit is affected by how many accounts you have open, your history, and the different types of accounts that you have. For example, length of credit history impacts 15% of your FICO score. So, if your oldest account is a decades-old joint credit card, you’re going to lose that history when it closes, and your credit score is likely to take a hit. The same is true of your home loan, car loan, and any other debts that you have. Paying off or otherwise closing these accounts can limit the mix of active loans that you have, which can also affect your credit score.
Missed Payments
Debt taken out during the course of a marriage may be considered marital property depending on your state’s laws. In a community property state, a judge may order to hold one spouse responsible for repaying a jointly-held debt. But, as long as your name is on an account, you’re responsible for the debt. This is true of joint accounts, even when you’re separated or divorced, because your divorce decree does not change the contract you entered with the lender at the time you took on the debt. According to Michael Bender, partner at the Grey Legal Group in California, such a situation may arise when one spouse moves out of the family home during the divorce process. “They think that because they’re no longer living there, they don’t need to make payments on the mortgage anymore. But the other spouse can’t afford to make the payments alone. That’s going to be reported—for both spouses—and we’ll see that having an effect,” said Bender.
Increased Debt
The average cost for divorce starts at $7,500, though that number can vary based on where you’re living and whether or not you need an attorney. Not many people can afford to foot that bill without it impacting their finances. If you end up needing to finance some or all of your divorce, the increased debt can end up impacting your credit score. Also remember to remove your soon-to-be-ex as an authorized user from credit cards in your name. The difference between a joint-card holder and an authorized user is that an authorized user is allowed to spend using the credit card but they may not be responsible to repay the balance.
How To Protect Your Credit During a Divorce
There are a few measures you can take to ensure your credit score doesn’t nosedive during or after your divorce proceedings.
Check Your Credit Report
Everyone is entitled to a free credit report each year. The three major credit bureaus, Equifax, Transunion, and Experian, may all have different scores and different accounts on their reports. Requesting your credit report will allow you to see what information each bureau has. It’ll also allow you to identify any joint accounts or accounts on which you’re an authorized user so that you can address these accordingly.
Close Joint Accounts
Although this can end up lowering your credit score, it’s also important that you close your joint accounts. You don’t want to be on the hook for purchases made on a shared card, especially if you and your ex are no longer in contact.
Review Your Monthly Expenses
Whether you are struggling with paying for the divorce or not, it may be a good time to do a complete financial health check. Understanding your monthly budget, income, and expenses will give you a better picture of your finances and shed light on areas of improvement. Cutting back on some non-essential costs—even temporarily—can help ease the financial burden of divorce. That may allow you to prioritize and pay down some of your debts. The good news is that making a budget will not only help you reduce your debt, it will also put you on a path of saving and investing for your goals.
Maintain All Payments
It may seem unfair to make payments for purchases you haven’t made or places you aren’t living, but the important thing to remember is that missed payments can have a big impact on your credit score. For example, the amount of money you owe accounts for 30% while payment history makes up for 65% weight of your FICO score. Keep making those payments until your name is no longer on the account to ensure that your credit doesn’t take a hit.
