It’s common knowledge that divorce can affect many aspects of a person’s life, including relationships, finances, stress, and even appetite and sleep. But, one thing that too many people fail to consider is how divorce can affect their FICO score. If you’re getting a divorce in the near future, here’s what you need to know about divorce and credit.
Does divorce the divorce itself hurt credit? By itself, filing for divorce will not affect your credit because your credit score is not determined by your marital status. However, your credit score can be indirectly affected by the divorce. Here’s how your credit score can be lowered because of your divorce:
1. You Don’t Close or Separate Joint Accounts.If you have joint accounts with your spouse, such as credit cards, auto loans, or mortgages, and you don’t close or separate these accounts, they can come back to haunt you. You see, someone has to pay these bills. If your spouse agrees to pay a certain debt; for example, their auto loan, and you do not remove your name from the loan, and they don’t pay it, the creditor will come after you for payment.
Unfortunately, creditors are not concerned with divorce decrees. So, even if your spouse agrees to pay their auto loan, a particular credit card, or the mortgage, as long as your name is on the loan, you are liable for the debt. If your spouse were to later lose their job, become disabled or ill, or if they simply refuse to pay the debt out of spite, the creditor will try to collect from you.
If you leave any joint accounts untouched, meaning, your name is still on it after the divorce, and your ex-spouse doesn’t keep their end of the bargain, you have no choice but to pay any bills that your ex isn’t able to cover, regardless if your ex was responsible for the debt per your divorce settlement agreement. While it may be difficult to do this, it’s the only way to protect your credit. Later on, you can try to recover the money by reporting it to the courts. Just make sure you check your joint debts monthly to ensure your ex is paying on them.
2. You Can’t Pay All of Your Bills.If you are now paying child support and spousal support while trying to support yourself, you may be stretched too thin. Or, if you were a homemaker or stay-at-home parent who was out of the workforce for some time and now you’re working again, you may not be earning enough money to pay all of your current expenses.
In either case, if you don’t have sufficient funds to pay all of your bills and you’re late, it will hurt your credit. Payment history plays an important role in your creditworthiness and if you have 30, 60, or 90-day lates on your credit report, your credit score will go down. If you run into this problem, you want to focus on two things: lowering your monthly expenses and increasing your income.
3. Living on Your Credit Cards.If your expenses as a newly single person are too high and you start living on credit cards, this is going to affect your credit score. Why? Because, credit usage is another important factor in your credit rating. If you run up your credit cards, your credit usage will be too high, and it will directly affect your credit score. If your credit utilization approaches the 30% territory, it can reduce your credit score. So, if you have $20,000 total in credit, try not to go above the $6,000 mark. Better yet, find ways to increase your income so you won’t have to rely on your credit cards to live.
4. Your Spouse Maxes Out Your Credit Cards.This one sounds cliché because it is. You’ve probably heard horror stories about vindictive spouses taking the credit cards and maxing them out on clothing, jewelry, spa days, tickets to concerts and sporting events, furniture, vacations, and anything else that floats their boat.
Beware: If your spouse has access to your credit cards or if you have joint cards, he or she may run up thousands of credit card debt in your name. Even if you have a card lying around the house, nothing’s stopping your spouse from taking the card and making online purchases and sending them to a friend’s house for delivery.
This is mostly an issue with authorized users because they’re not liable for the debt they incur. So, if you have credit cards and your spouse is an authorized user, he or she can go on a spending spree without suffering the consequences. If you can’t afford to pay off the debt your spouse runs up, it can damage your credit.
If your spouse’s name is on any of your individual credit card accounts, remove his or her name from the account right away. Even if your spouse is usually very reasonable, they may become vindictive during the split – you just never know how someone is going to react while they’re grieving over a divorce.
If you’re going through a divorce, know that it doesn’t have to negatively impact your credit. If you have joint bills, see if you can close them or put them in one spouse’s name alone. If your spouse is an authorized user, remove his or her name from all accounts.
Just remember that if you have any joint bills remaining, you have to make sure they get paid regardless. Make sure you pay your personal bills and stay within your post-divorce budget. Most importantly, be nice to your spouse. The more amicable the divorce, the less likely your ex will try to get revenge and damage your credit.
If you need a Los Angeles divorce lawyer, don’t hesitate to contact Claery & Hammond, LLP for a free case evaluation!