Divorce leads to many changes in life. As you attempt to move on with your life after divorce, it may be important to understand how divorce affects your credit. Below are a few common credit issues that may occur.
Closed Accounts and Changes in Ratios
In many cases, credit cards and other shared accounts may be paid off and closed as a result of a divorce. Although this may seem like a good thing, it can actually negatively impact your credit score. Here’s why…
One factor in your credit score is how much credit line you use compared to available credit limits. It is measured as a percentage and lower percentages are more favorable than higher ones. For example, if you have $10,000 in available credit and have a balance of $1,000 total on those credit cards, you are using only 10% of your credit limit. This would lead to a better credit score than if you had a balance of $5,000 (using 50% of your credit limit). Why do credit bureaus look at this information? If you are relying less on your credit cards, then it’s a sign that you are more financially stable.
When credit card accounts are closed, you are reducing the amount of total credit available. Depending on the remaining accounts and your balances on them, your percentage of credit being used might be higher. This may reduce your credit score.
Party Responsible for Payment
In a divorce agreement, the individual whose name is on a debt may not necessarily be responsible for paying that debt. For instance, perhaps you have a joint loan. Normally, to remove a name from a loan, it must be refinanced into a new loan. If your ex-spouse is assigned responsibility for that loan but cannot qualify for a refinance, then both of your names will remain on the account. Although your ex-spouse makes payments, the debt is still reported to the credit bureaus under both of your names. Therefore, any late or missed payments will impact your credit score. This situation can affect your credit even years after a divorce.
More on How Divorce Affects Your Credit
The above are two common examples of how divorce affects your credit negatively. Every divorce situation is different and there may be other things to consider. Your divorce attorney can guide you through financial negotiations and provide advice on how different arrangements may affect you short and long term.