Divorce is a difficult and painful experience for many people.
The process of ending a once-loving marriage, establishing a new lifestyle, and separating shared finances can be complicated. If you are a parent, resolving custody issues can be even more difficult.
In the chaos of divorce, people often ignore their credit. Unfortunately, this is a big mistake.
If you fail to protect your credit during a divorce, your credit score can suffer. If your credit is damaged by a divorce, these problems can haunt you for years.
How divorce can hurt credit scores
If you fail to protect your credit during a divorce, your credit score can suffer. If your credit is damaged by a divorce, these problems can haunt you for years. Let’s start with the good news. Divorce does not automatically destroy your credit score.
In fact, you don’t have to worry about your credit being damaged by the divorce itself. Your marital status does not appear on your credit report and does not directly affect your score.
But it’s no secret that divorce and credit issues often go hand in hand. There are two reasons why your credit score can go down during a divorce.
1. Creditors don’t honor divorce decrees.
Managing joint finances and accounting is a complicated part of divorce. If your divorce is complicated, splitting joint accounts can be an absolute nightmare.
During a divorce, the court makes a decision, a divorce decree. A divorce decree details the division of marital assets and debts, including which spouse is responsible for paying each creditor.
For example, if you have a joint car loan, your divorce decree will specify who owns the car and who is responsible for paying the loan.
There is only one problem. Creditors and collection agencies do not honor divorce judgments. If a judge orders your ex-spouse to pay your joint loan and he doesn’t, your personal credit could be damaged.
2. Joint accounts stay on your credit reports.
When you first enter into a joint credit agreement with your spouse, the account may be included on both your Equifax, TransUnion, and Experian credit reports (depending on the lender’s policies).
Divorce does not eliminate joint accounts with your ex, nor does it remove them from your credit report. Your lender expects you to pay back the money you borrowed plus any previously agreed interest. This account will remain on your credit report regardless of who is responsible in the divorce decree.
Here’s why this could be a problem: If your ex-partner is responsible for making payments on a joint account and is late on payments, the late payments can show up on your credit report and hurt your credit. Even if your ex-spouse decides to charge you a lot of fees on your joint credit card account, you’re still responsible for paying the debt. In fact, a high credit utilization ratio on a joint credit card can hurt you and your previous credit score, even if you make all your payments on time.
The easiest way to separate joint accounts is to work with your ex to find a solution that protects all of your credit reports. Of course, depending on whether your divorce was amicable, this may or may not be a realistic expectation.
Why divorce might be harder on women’s credit
As mentioned earlier, divorce does not directly affect your credit report or score. By the way, gender does not affect your credit score. The Equal Credit Opportunity Act (ECOA) strictly prohibits lenders from using credit scoring systems that discriminate on the basis of age, race, religion and sex.
However, divorce can indirectly affect your credit score due to financial problems. Financial problems during divorce can have a disproportionate impact, especially on women.
One of the reasons divorce takes such a toll on women’s financial lives is that, on average, women earn less than men. The Bureau of Labor Statistics reported that the median full-time, weekly or wage earned in the fourth quarter of 2018 was $991. By comparison, women earned an average of $796 during this period, about $200 less per week than men.
A study commissioned by Experian also revealed surprising results about the impact of divorce on men’s credit scores compared to women’s. According to the survey, 54 percent of divorced people said their credit score suffered during their marriage. Almost 50% of the women surveyed stated that they had previously defaulted on their credit.
How to protect your credit during a divorce
Every divorce is different. Resolving debts from an ex-spouse is difficult, regardless of gender. Ultimately, it’s up to you to protect your credit from damage during your divorce. These three tips can help:
- Close joint credit cards and remove your ex as an authorized user on any credit cards opened in your name.
- To prevent a vengeful ex-spouse from opening fraudulent accounts in your name, freeze your credit reports with all three credit reporting agencies.
- If possible, work with your ex to separate joint accounts. For example, if you have a joint mortgage, the spouse who owns the home can refinance the loan on your behalf. Another option for joint loans (for example, mortgage and car loans) is to sell an asset (for example, a house or car) and use the proceeds from the sale to pay off other joint debts.
- Open your own bank account. To protect your new finances, consider opening new checking and savings accounts at an online bank. Online banks can offer convenience and usually offer higher savings rates than traditional banks. For example, Capital One’s online savings account offers 10x the national average on all balances and has no minimum balance requirement.
Moving forward
Sometimes credit damage cannot be avoided during a divorce. For example, if you’re a stay-at-home mom and suddenly have to find a job, it may take some time to recover financially. However, creditors do not expect payment.
Late payments, unpaid bills and collections can result in credit fees. In severe cases, you may need to file for creditor protection during or after a divorce.
If your divorce damaged your credit, that’s good news. Your credit can be rebuilt over time. If possible, you should do everything you can to protect your credit during a divorce, but remember that you don’t have to be stuck with damaged credit forever if the worst happens.d
