When you go through a divorce, emotional and lifestyle changes take place - to say the least. On top of these changes, there are many financial challenges to deal with during the fallout. To name a few, you may have to make alimony payments moving forward, take on new day-to-day expenses (as opposed to sharing costs with a spouse), or even establish an entirely new individual budget.
All of these factors directly impact your wallet. But what about your credit? Even during marriage, each spouse’s credit score is tracked individually. If no accounts were in your name, there’s a chance you have no established credit history. On the flipside, you could be stuck with a high debt-to-income ratio (DTI) if all the accounts were in your name.
At the end of the day, you first need to have an understanding of how divorce impacts your credit. Once you know, you can move forward. It’s entirely possible to make positive changes that directly impact or help repair your credit.
How Can a Divorce Impact Your Credit?
In addition to what was mentioned, there are various ways a divorce can impact your credit. If you still have joint debt or credit accounts with your former spouse, you could be in for an awkward and potentially damaging situation. Let’s say you expect your ex-spouse to help with the payments or make all the payments. If they don’t, then you run the risk of missing payments which negatively impacts your credit score – as well as your spouse’s score.
A key aspect of post-divorce finance is reduced income. Now you must rely on your individual income as opposed to your joint income. This can be very problematic if you find yourself suddenly burdened with high debt after a divorce. A significant factor for credit profiles is debt-to-income ratio. High debt relative to income is a negative factor and leads to lower credit scores.
Furthermore, leaving a joint credit account open could allow one spouse to intentionally rack up debt. Since you are still named on the account, you are liable. If the debt level is too high, then your individual DTI could suffer. If you don’t see the charges, then you could also miss payments which will hurt your credit.
Oftentimes after a divorce, one spouse may be legally obligated to make monthly payments such as child support or alimony. Failing to make any of these payments will show up on your credit report and drop your score.
Figuring Out Your Path Forward
Regardless of your financial situation, you need to establish or re-establish your independent credit profile moving forward. Here are a few steps to get your finances in order following a divorce.
Check Your Credit
For starters, check your credit score! You may have no idea what your credit score is, especially if it was your spouse who often applied for accounts. When you get divorced, check your credit so you know what you’re working with. You can check your credit report for free from each major credit bureau once a year. You may find your credit profile is decent or even excellent, but if not, at least you’ll know that it needs improvement.
Pay Down Any Outstanding Joint Accounts
Getting rid of any jointly-held debt should be a priority. Don’t ignore these accounts until after the divorce is finalized. Paying these down sooner rather than later will help you in several ways. First, you won’t have to correspond with your ex-spouse when they’re paid off. Second, reducing the debt to your name will reduce your DTI and improve your credit score. Ideally, you can pay them down with the help of your ex, but this may not always be possible.
If you are suddenly legally responsible for multiple accounts, you may want to consider taking out a personal loan to consolidate debt. First, you can pay off all joint accounts immediately and fulfill that obligation. Second, you must pay off the personal loan in monthly installments, and making these payments will help you build your credit score. A personal loan is just one way to consolidate debt. A balance transfer credit card is an alternative for those who have low-balance accounts.
Separate or Cancel Shared Accounts After Repayment
After any joint credit account or loan is paid off, make sure it is canceled immediately. Removing this joint account will help you establish your own financial identity again. It also will keep anyone from racking up debt for it in the future. Furthermore, make sure to close any joint bank accounts – you will need your own bank account moving forward for obvious reasons.
Quick tip: if your ex-spouse is an authorized user on a credit card account, make sure you contact the credit company and remove his or her access. This account is already in your name which could be a good thing if it’s in good standing. It will also keep your ex-spouse from spending anymore on the card.
Establish Individual Credit Accounts
If you haven’t already, you need to work toward establishing a new credit history independently. This means opening up individual credit accounts or potentially taking out a loan if needed. It was mentioned a personal loan or balance transfer card could help pay off joint accounts. This is an example of establishing individual credit, and if it makes sense to do this early, then you have a head start.
Let’s say you don’t need a loan. You could simply open up a new credit card to get started. Maintaining a line of credit can be an important credit score factor. Generally, you want to utilize up to 30% or 40% of your credit limit and pay off the balance religiously. Making payments on schedule will positively impact your credit score, and keeping your credit utilization ratio somewhat low will also help.
Divorce is never easy. On top of the emotional strain, it can have an enormous financial impact. The best thing you can do is be proactive and prepare for the financial repercussions. Be aware of joint accounts and start separating or cancelling them as soon as possible. Don’t fall behind on any payments during your divorce proceedings – or ever for that matter.
With joint accounts out of the way, you are then free to focus on your personal credit accounts.