Going through a divorce can result in many changes to your finances, including a difference in income, expenses, and what you are able to save. It could also impact your credit score as you realign your existing joint accounts to reflect your newly single status.
- A divorce may result in financial changes that can impact your credit score.
- Late or missed payments by your former spouse on joint accounts will negatively impact your credit score, so you should remove your ex from those accounts.
- Making on-time payments to your lenders is key to improving your credit score.
What Is a Good Credit Score?
Credit scores range from 300 to 850, and the higher the score, the better. Experian says that a score of 700 or higher is generally considered good, with 800 and above considered excellent. If your credit score is below 700, you could still qualify for credit cards, mortgages, or other loans, but you may have to pay higher interest rates or meet other qualification requirements.
The following are steps you can take to fend off harm to your credit and maintain a good credit score after a divorce.
Change Credit Card Accounts
When spouses have a credit card together, the card is usually in one spouse's name, and the other spouse is an authorized user. (Most major credit card issuers do not issue credit cards that have joint account holders.) Working together to pay off these accounts may be the best approach for protecting your credit score. If you are able to do so, there will be no disruption to your credit history and your credit score will remain intact.
However, if working together to pay off these accounts is not possible, it is imperative to have your name removed as soon as possible from all the accounts for which your ex is responsible. This prevents any damage to your credit history should your ex make late payments or if an account in their name becomes delinquent. Likewise, you should remove your former spouse as an authorized user from any account over which you retain control. That way they cannot run up a large balance on your account.
Monitor Your Credit Utilization Rate
If any accounts are closed, expect to see a small reduction in your credit score because closing them will affect your credit utilization rate. This metric measures how much of your available credit you are using at any given time.
Let's say you have $50,000 of total available credit (the total limit of your credit cards and/or lines) and you are using $25,000 of that credit; that means your credit utilization rate is 50%. If you have a joint account with a $15,000 credit limit, and you remove your name from it or close it, your available credit drops from $50,000 to $35,000. It also deducts the amount of debt you still have on the account from how much total credit you are using because you are no longer responsible for that account. These changes inevitably affect your rate.
If changes due to your divorce increase your credit utilization rate, your credit score may drop a few points, so you should work to lower your rate going forward.
Although there is no set recommendation for an ideal credit utilization rate, many financial experts suggest keeping it below 30%.
Deal With Jointly Held Debt
If you have joint debt with your spouse, such as a mortgage or car loan, it can be difficult to have your name (or theirs) removed from the loan. Although your divorce decree should outline who is responsible for the debt, the lender will continue to hold both parties legally liable for paying back the loan. If your ex is supposed to pay it off but makes late payments or none at all, that delinquent behavior will be reported on your credit report as long as your name remains on the loan.
The best course of action is to have any joint loans refinanced by the person who will be responsible for the debt going forward. This will remove the other party from the loan. So if you plan to keep paying for your own car, for example, you should refinance the existing car loan in your name only. However, if you have a home mortgage in both of your names, the only resolution may be to sell the property if neither of you can assume full responsibility for the debt.
Adjust for a Change in Income
Following a divorce, there is likely to be a change in income that could have an indirect impact on your credit score. The most significant change is going from a two-income home to a one-income home. Even alimony and/or child support payments may not be enough to make up for the decrease. This is especially true for women, given that in 2021, women still earn 82 cents for every dollar a man earns, according to the U.S. Department of Labor. This phenomenon is known as the gender pay gap.
Having less monthly income could mean less money for your loan and credit card payments, risking late or missed payments and a credit score reduction. Even if you are eventually able to make your payments on time, any lapse in on-time payments means your credit score will take additional time to recover.
After your divorce, be sure to create a budget to make sure you can plan for—and make—on-time payments to your lenders.
Repair a Damaged Credit Score
During your marriage, it’s possible your credit score took a hit because your spouse failed to make payments on time or at all. If so, you will need time to rebuild your score after your finances are disentangled. One key way to repair a damaged credit score is by making on-time payments. Even if you can only pay the minimum amount due, it’s imperative to make that payment on time so your credit score won’t suffer further harm. If possible, try to make additional payments at any time during the month to help reduce your debt.
Another way to start boosting your credit score is to open new individual credit accounts in your name. If your score is not great, you may only qualify for a secured credit card, meaning you’ll pay a deposit on the account, which will serve as your credit limit. When your credit score starts to improve, you could qualify for an unsecured card that you can continue to use to boost your credit score.
However, when working to rebuild your credit score, don’t get carried away opening new credit cards. Although having a lot of unused credit is good for your credit utilization rate, opening too many new accounts at one time could have a negative impact on your credit score. Applying for a credit card results in a hard inquiry on your credit report, which dings your credit score a bit. Also, having several new accounts reduces the average age of your accounts, which could also lower your credit score. If you’re shopping around for a new mortgage or car loan, however, credit inquiries from those lenders likely won’t damage your credit score.
Keeping your debt load down can also benefit your credit score. Remember that credit agencies favor those with a low credit utilization rate, so paying off credit cards and keeping existing credit card balances to a minimum will improve your credit score. Repairing a damaged credit score takes time, so don’t get discouraged if you don’t see an immediate increase.
A Note of Caution
When trying to repair or prevent damage to your credit score following a divorce, you may hear about some quick-fix solutions. A credit repair company, for instance, may offer to repair your credit for you if you pay a set fee. Usually, there’s nothing it can do for you that you can’t do for yourself for free.
Likewise, debt settlement companies may offer to settle your debt for less than you owe. However, not only does this cost you money, but it could also damage your credit score if, for example, the company instructs you to stop making payments while it “negotiates” with the credit card company. Those missed payments will reduce your credit score.
Another option could be a debt consolidation loan, wherein you take out a loan to pay off all your credit cards. This could be beneficial because you may end up paying a lower amount in interest over the term of the loan than you would to the credit card companies. However, if after getting the loan you continue to use those credit cards and accrue more debt, you could end up owing more than you did before, making it harder than ever to pay off your debt.
Does Divorce Impact My Credit Score?
Filing for or finalizing a divorce by itself doesn't affect your credit score. Indirectly, late or missed payments on jointly held debt accounts or huge purchases by an authorized user on a credit card account could. Even if a divorce decree instructs your spouse to make payments on a joint account, if those payments are not made, you will see a negative impact on your credit score.
Does It Make Sense to Freeze My Credit During Divorce?
It might. A credit freeze is really a restriction on who can access your credit report. This could include a soon-to-be ex trying to take out new credit or borrow money using your identity. Essentially, a credit freeze prevents new credit from being acquired. A credit freeze will not prevent your spouse from making charges if they already have access to a credit card account—as an authorized user, for example.
What Happens to My Credit Card Points During Divorce?
Some credit card point programs let you transfer points between cards, meaning you and your ex could divide the points. You could add up the dollar value of the points and one spouse could buy out the other. If allowed, points could be used to pay down the balance on the cards, which could be helpful to both of you and potentially raise your credit score as the debt is reduced.
The Bottom Line
Following a divorce, it is important to keep an eye on your credit report to make sure no incorrect items appear. All consumers are entitled to a free credit report from all three credit reporting agencies every 12 months. You can access your free reports online at AnnualCreditReport.com. If you spot any inconsistencies or mistakes, follow the individual credit agencies' recommended steps to have the errors corrected.
Also, keep doing what improves your credit score: making on-time payments, keeping your debt load low, and regularly reviewing your credit report to ensure it's free of mistakes. Although change doesn’t happen overnight, your hard work will be rewarded with a higher credit score.