If you are currently going through a divorce, you are not alone. Statistics show almost 50 percent of all marriages in the United States will end in divorce or separation. While this major life change can take an emotional toll, it can also greatly affect your financial stability and credit score.
How does divorce hurt your credit? Does divorce show up on a credit report? Here we look at exactly how a divorce can hurt your credit and what steps you can take to help protect your credit.
- A divorce does not directly affect one’s credit score, but the division of assets and accounts can affect joint accounts, credit card balances, and mortgages.
- Joint accounts and credit cards can cause damage to credit scores if one party misses payments or if a joint account is closed, increasing credit utilization.
- A divorce decree does not hold weight for mortgage debt and creditors do not honor it, so both parties are responsible for the mortgage.
- Protect credit during divorce: Pay off accounts, contact lenders to convert joint accounts, make payments on time, consider home refinance, and monitor credit reports.
Divorce and credit score
Your credit reports do not contain your marital status, and signing divorce papers does not directly affect your credit. However, your accounts are often affected by the division of assets and accounts with a divorce.
Missing payments on joint debt
If you and your spouse have joint accounts, these are usually addressed within the divorce decree. A judge decides which debt each party is responsible for. Unfortunately, creditors do not take these judgments into consideration. In their eyes, this joint debt is the responsibility of both parties. Should your ex-spouse miss a payment, it will also affect your credit score.
Closing of joint credit cards
In many cases, couples decide to close joint accounts during a divorce. While closing joint accounts helps avoid any potential concerns of missing payments by the spouse responsible for the debt, losing a card with available credit can greatly affect your credit utilization. For example, you and your spouse each have individual accounts with a credit limit of $5,000 and then a joint account with an available limit of $5,000. The joint account has a full available limit, and your personal card has a balance of $2,500. With both cards, your credit utilization is 25%. However, if you close the joint account, your utilization is now 50%, contributing to a lower credit score.
Being removed as an authorized user on your spouse’s credit card(s)
An authorized user on a credit card gives the user the ability to access the credit without the obligation to make payments. However, as an authorized user, you receive the benefits (such as a decrease in credit utilization) to your credit score when the account holder makes consistent, on-time payments. Being removed as an authorized user from an account, you are likely to see an increase in credit utilization and a negative impact on your credit.
Creditors don’t honor divorce decrees
Unfortunately, creditors do not honor divorce decrees despite going to court and receiving a judge’s order to divide your credit debt. If your name is on the account, you are still liable for the debt. If your ex-spouse decides to skip out on accounts that they were ordered to pay in the divorce, creditors can still come after you for payment, and the lack of payments can impact your credit report.
What happens to a mortgage after a divorce?
During a divorce, it is common for one party to maintain residence in the home they purchased together. In most cases, the divorce decree states which spouse maintains the home and is responsible for the mortgage payments. However, similar to credit card debt, the mortgage lender does not honor divorce decrees, and both parties are responsible for the mortgage. In this case, if your ex-spouse is awarded the home but does not make payments, the lender can come after you to collect a payment, and the lack of payments will reflect on your credit report.
How to protect your credit during a divorce?
When a divorce decree doesn’t hold weight for credit or mortgage debt, you must take the necessary steps to help maintain your credit. Some of these steps may not be possible, depending on your relationship with your ex-spouse. However, if working together is not possible, there are some things you can do on your own.
- Work together: If possible, work together with your ex-spouse to gradually pay off and close existing accounts. For example, you can begin by freezing any new spending and agree to make equal monthly payments until the debt is paid in full.
- Contact lenders: This is an important step for a variety of reasons. If you cannot work with your spouse to pay off and close joint accounts, talk to the lender about converting the debt to an individual account. If you believe all your debts are personal, it is still good to contact all your lenders to ensure your ex-spouse is not listed as an authorized user.
- Make all your payments on time: Make sure you pay all your debts on time. For the joint debts your spouse is responsible for, it is good to call and make sure payments are still being made. If they are not, you can step in and avoid any damage to your credit before it takes place.
- Consider home refinance: When both parties are on mortgage debt, consider getting a mortgage refinance or home sale if you are not the party retaining the home. This will protect your credit from defaulted home mortgage payments.
- Check your credit report often: Because you are not aware of your ex-spouse’s activity when paying debt obligations, you must regularly monitor your credit report to help ensure their non-payment is not affecting your credit score.
Saving your home and credit score after a divorce
A good credit score is essential for purchasing your dream home. While divorce can take its toll emotionally, following these tips will help ensure that it doesn’t damage your credit score and your chances of owning your dream home.
At Hero Home Programs, our goal is to help everyone achieve the dream of homeownership, and helping maintain a good credit score is only the beginning. Schedule a call with us today to learn how we can help you find and qualify for the perfect home.