How does divorce affect your credit score? Well, it depends.
When thinking about your credit during divorce, it is important to first understand how lenders use your credit score, also called a FICO score. When you apply for any kind of credit, for example a credit card, loan or mortgage, lenders check one of the credit information bureaus, such as Experian, TransUnion or Equifax, to review your credit score. The score tells potential lenders whether you are a low-risk or high-risk borrower and can also affect how much interest you will have to pay when you borrow. Credit scores range from a high of 850 to a low of 300. The higher your score, the easier it is for you to borrow money when needed.
Here's a breakdown of the key elements that determine your credit score:
- Payment History: 35%
- Amounts Owed: 30%
- New Credit: 10%
- Length of Credit History: 15%
- Credit Mix: 10%
As you can see, your marital status is not a consideration regarding your credit score. In fact, Experian, one of the largest providers of credit information, states, “Divorce proceedings don’t affect your credit report or credit scores directly.” (For related reading, see: The 5 Biggest Factors That Affect Your Credit.)
How Can Divorce Hurt Your Credit Score?
When you are going through divorce, you need to check your credit report. You will see all the accounts listed in your name and accounts held jointly with your spouse. You are responsible for any debt with your name on it, regardless of whether you are married or divorced.
Let us consider a very simple example. You have a joint credit card account with your spouse and you get divorced. For whatever reason, you do not change the names on the account after the divorce. A few years later your now ex-spouse charges a few thousand dollars on the credit card and fails to pay the bill. Your credit score will be affected, which could hurt you, for example, if you try to apply for a mortgage. (For more from this author, see: 3 Tips for Getting a Mortgage After a Divorce.)
You Can Protect Your Credit in Divorce
As soon as you start the divorce process, you need to view your credit report to see what accounts you have. Pay particular attention to any joint accounts you have with your soon-to-be ex-spouse.
Once the divorce is finalized, you must make sure your name is removed from any accounts you are no longer responsible for as part of the settlement, which could mean mortgages, credit cards, personal loans or any other kind of debt you may have. Be sure to follow up with every joint or marital account to avoid potentially disastrous consequences later.
It’s Not All Bad News
Divorce could also benefit your credit. As part of the divorce settlement, your spouse may become solely responsible for any joint debts, and you would be able to remove your name from those accounts. This would lower your total debt in your new single life. With less debt, your score could increase.
Be sure to know what credit accounts you have and stay up-to-date on any changes as you go through divorce. It could have important consequences for your financial life long after the process is over.
(For more from this author, see: 5 Financial Steps You Need to Take Before Divorce.)