Divorce Is Expensive, & Can Affect Your Credit Decisions
Marital status does not affect creditworthiness, so filing for divorce does not immediately impact your credit score. However, many divorcees experience problems with their credit after the fact. Here are a few of the reasons why.
While separating spouses may amicably work out visitation and custody agreements, only a court of law can issue a divorce decree. This means you either hire a lawyer or try to proceed through the divorce court system, and the piles of paperwork and legalese that most of us aren’t familiar with, on your own.
Most people opt to work with a divorce lawyer. If your divorce is at all complicated or hostile, the bills can add up quickly, although the outcome can be far worse if you try to file the paperwork yourself and ruin it.
A messy divorce can take a toll on a person’s finances, resulting in late bill payments or higher-than-normal credit card debt to help cover the extra costs. These are the types of things that negatively affect your credit.
Divorce Reduces Your Income
If you were a two-income household, you are now a one-income household. If your ex-spouse was the primary breadwinner, you are now reliant on timely alimony payments or securing a new job for income.
This change in financial situation can result in missed bill payments or increased credit card debt, both of which impact credit. It also can result in credit card companies reducing the amount of credit you are eligible for, because you no longer have as high of an income, so you may now have a higher debt-to-income ratio, which can impact your credit score.
It’s important to create a new budget for yourself as soon as possible and accept making some lifestyle changes. Are there monthly luxuries you can do without, such as music-streaming services, wine-of-the-month-club subscriptions, or gym memberships? Should you sell your home or car? These are the types of hard, but necessary, decisions you must make sooner than later to maintain a strong credit rating.
Joint Debt Is Neglected or Abused
Do you and your soon-to-be-ex have joint credit card accounts or joint debt, such as a mortgage or car payment? If accounts are in both of your names, both of your credit scores can suffer for non-payment of the joint debt, regardless of whom the judge orders to pay the bill.
If your spouse is not paying his or her share of joint credit debt, you have no choice but to pay it yourself or suffer the credit consequences. You can try to go back to the court later to sue for reimbursement.
A problem that arises in some divorce situations is that one spouse purposely runs up joint credit card bills to hurt the other spouse. It’s best to separate all joint accounts as quickly as possible. You may need to work with your lawyer to find out what you legally can and cannot change, and especially your spouse will be relying on you for ongoing support. If you can, however, it is best to close any joint accounts or completely remove your spouse’s name from the accounts. If you have any credit cards accounts that are in your name with your spouse listed as an ‘authorized user,’ be sure to change that ASAP. An authorized user can spend the money but isn’t responsible for the debt.
Another problem that can come up in a divorce situation is that one spouse does not fully disclose all his or her debts. Hiding assets or debts during a divorce is, unfortunately, a common problem. It also is illegal, which is why retaining the services of a competent attorney during your divorce is extremely important, even if it does cost more in the short-term.
Divorce is Chaotic
It’s easy to overlook everyday chores and bill payments when you’re in the middle of a divorce. Divorce is a complicated and overwhelming process, especially if there are kids or significant assets involved.
Some people end up missing bill payments because they forget to do simple things, such as notifying the post office they changed their address.
To stay organized and on track with your finances, request a copy of your credit report from the three major credit reporting agencies, Equifax, Experian or TransUnion. Make a note of all debts on the report, close any joint accounts that can be closed, and make sure you are receiving the monthly statements for all other open credit accounts. Even after the divorce, continue to monitor your credit report to prevent any errors.
Ending a marriage is emotionally draining. Don’t let divorce be financially draining as well. Do your homework, surround yourself with competent advisors, and take the steps necessary to protect your creditworthiness now and for the future.