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How Can Divorce Affect Your Credit?

Updated on:
Content was accurate at the time of publication.

Divorce is tough in many ways ― it can also be tough on your credit score. Going through a divorce itself will not lower your credit score since it has nothing to do with your credit history. Still, it’s a major life event where a person’s finances can get upturned for myriad reasons. And financial issues often lead to problems with your credit.

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How divorce can affect your credit

Missed payments

During the divorce process, an agreement can be made regarding payments on certain financial obligations. An individual may think they’re secure, only to find out that the terms of the agreement were never followed by their ex. Lack of payments from joint accounts could be disastrous to a credit score.

Terms of separation agreements can vary by state, but more importantly, they mean little to the creditors. If you and your ex are on the hook together for a payment, credit issuers will expect their money despite your changing martial status. Missing a bill during this time can still affect your credit.

Taking on too much debt

A divorce will raise the question of who will pay for the credit cards and other debt, which will typically be figured out in the settlement agreement. One person may choose to take on more of the debt burden, but that can be a costly mistake. Keep in mind your debt-to-income ratio. If you begin to carry extra debt during your divorce and you don’t have the income to cover it, it could cause lenders to find you financially unfit.

Mortgages and other loans with collateral

Credit cards can be divvied up, but mortgages and auto loans are not so easily dealt with. If both names are on these loans, a settlement agreement may require the loans to be refinanced into one person’s name, but the titles and deeds may still have both names. If certain fees or taxes are not paid, both parties on the title or deed may find themselves with an unpaid bill that may appear on their credit report.

 Learn more about how to preserve home equity during a divorce.

Tax returns

If you file a joint tax return, the timing of your divorce might affect your tax filings. For starters, you’ll need to consider how to share any tax refunds or bills and how to tackle a possible audit.

These are important questions that don’t have clear answers, as every situation is different. Just be mindful that dealing with the taxman is one more financial issue that can get complicated in a divorce.

Lack of credit history

More than half of the family households in the U.S. are two-income families, according to the Bureau of Labor Statistics. However, there are still many households with only one breadwinner, and there are instances where the person without any income is financially dependent on the other.

When a divorce is finalized, the individual without any income may have to contend with having little to no credit history. For someone who was married for a long period of time, this means they may find that their credit history is no different than a teenager’s, which makes it incredibly difficult to apply for credit or loans.

How you can protect yourself

For those going through a divorce, there are ways to prevent the previously mentioned scenarios from happening.

Be proactive

Don’t wait to talk about financials until you’re served with divorce papers. In fact, discussing the financial future if something goes wrong should be talked about even before saying “I do.” It’s not romantic, but it’s important.

When the marriage begins to sour, it’s time to start working on a plan.

Start the switch from joint to individual accounts, both credit and deposit. If there is a settlement agreement that states who will pay what debt, verify these bills are being paid on time. Also, try to include language stating what will happen if debts are not paid in a timely fashion.

Monitor your credit

Over the course of a marriage, couples become comfortable with sharing their information. Social security number, birth date and a fake signature are enough to add a person to a credit card, loan or another kind of debt without their knowledge or consent. After a divorce, one person may try to apply for credit and find out their name is on accounts they never knew about.

Getting a free credit report and signing up for a credit-monitoring service are beneficial since they’ll keep you apprised in the event an ex decides to be vindictive and opens up accounts under your name. It’s also a good idea to change any passwords an ex may know.

Consider mediation

Divorce isn’t cheap. A survey by Nolo showed that a divorce in the U.S. can cost as much as $23,300 if requiring a lawyer and trial on two or more issues. The survey also found an average rate of $270 per hour for divorce attorneys. In comparison, divorce mediation can often be done for far less or even free.

Driving up your divorce costs could hurt your credit. Instead of paying lawyers to battle in court, choosing mediation can lead to the same conclusion while saving a lot of money.

Refinance the mortgage

The person who received the house in the settlement should immediately begin the process of refinancing the home. This will not be easy as the individual will likely have less household income. But it’s best for both parties if the mortgage is in one person’s name as it will remove any legal ties from the loan as well as allow for a change on the deed for the house.

Check the small things

It’s easy to focus on the big accounts like credit cards, mortgages and other loans, but there are smaller accounts that also need to be addressed during a divorce. This includes gym memberships, cell phones and other accounts that have a contract. If these obligations go unpaid, like the other big debts, they can appear on your credit report as a derogatory mark.

Going through a divorce is not fun for anyone. It takes a toll emotionally and financially. But with proper planning, an individual can survive the ordeal with their credit intact.