Divorce typically has a large financial impact on your life. Going from a double to a single household income can be difficult. There is also the cost of the divorce itself that can create a hardship. What some do not realize is the impact of divorce on credit ratings. Here is why and how divorce may impact credit.
Distribution of Debts
Part of the divorce process includes assignment of debt. You and your ex-spouse may have accounts on which you are both listed as well as individual accounts. Whose name appears on the debt does not necessarily determine who becomes responsible for it after divorce. If your spouse is responsible for paying a debt that is under your name (i.e. a joint credit card), the payment history for that account will continue to be reported to the credit bureaus until the account is paid off and closed. This means that any late payments or delinquencies will hurt your credit score.
The only way around the issue above is to pay off and close old accounts (either by using the assets of the marriage or by refinancing debt). Although this can simplify credit history, it can have other negative effects on your credit score. This occurs because credit bureaus evaluate both credit history and percentage of credit used. When you close an old account, you are eliminating some of that history and may also be increasing the percentage of remaining credit being used.
Here’s a more specific example. Imagine that you and your spouse had credit cards with a total limit of $15,000 and you had a balance of $5,000. Additionally, you have a credit card in just your name with a credit line of $5,000 and you had a balance of $2,5000. Overall, you are using 37.5% of your available credit ($7,500 / $20,000). If you pay off and close your joint accounts, that leaves you with just the individual accounts. Your balance percentage becomes 50% ($2,500 / $5,000). A higher percentage of used credit results in a lower credit score.
Impact of Divorce on Credit Scores and Future Financial Prospects
These are just 2 common examples of the impact of divorce on credit scores. It is important to keep these in mind. Credit scores are being referenced more and more these days. It is used in loan considerations, apartment rental applications, insurance quotes, and even job applications. Minimizing the impact of divorce on your credit score will help you move on with the next stage of your life and enable you to financially thrive. Contact us for information and guidance on your upcoming divorce.