A divorce can be one of the most traumatic life events a person can experience. During and after the dissolution of a marriage, both spouses can have trouble coping with feelings of loss, failure, regret – and both can struggle financially as well.
Legal fees, asset-division, child support and alimony can ruin otherwise healthy finances. Contrary to what you might think, however, none of these aspects of divorce will directly affect your credit score.
If you’re in the midst of a marital split, consider some of the positive and negative ways a divorce can impact your credit indirectly and how to prepare yourself to recover financially.
1. Your Ex Stops Paying for Joint Accounts
Many spouses jointly share credit accounts, like a mortgage or credit cards. In some cases, those accounts could still remain in both your names even after a divorce. If your ex begins making late payments or stops paying altogether, you are still responsible to pay those bills in full. Failure to do so can hurt your credit.
Your lenders want to be paid no matter who foots the bill and no matter what your divorce contract states. If you’re on amicable, cooperative terms with your ex, you might be able to work out mutually beneficial payment arrangements. A spiteful ex, however, might avoid making payments or begin racking up debt to cause you trouble.
If you and your ex don’t want to maintain a joint account – or can’t – then you might need to make changes to the account. Lisa Hutter, senior vice president and regional wealth planning manager at Wells Fargo, suggests people consider one of the following options based on what the lender will allow or accommodate:
- Freeze the account pending resolution
- Remove your ex from the account so that the account is in your name only
- Close the account and re-open it in your name only
In some cases, these actions or changes to account activity could initially ding your credit score, but once you’ve re-established an on-time payment history, you’ll be able to build up your credit score again.
2. Your Divorce Expenses Result in Too Much Debt
A costly divorce can cause you to miss bill or loan payments, rack up credit card debt or be subject to a lien on your house, all of which can hurt your credit. “A complex custody litigation can cost upwards of $20,000, and most people don’t have that kind of cash on hand and have to borrow the money or fall behind on other bills,” says Joleena Louis, a divorce attorney in New York City.
Louis advises her clients in these cases to use marital assets, like a house or car, to pay off any existing debt that has gone unchecked in the midst of an expensive divorce. Creating a post-divorce budget, increasing your income, and decreasing your expenses in order to keep your credit in check are all steps you will likely need to take in order to weather this financial storm.
Your pre-divorce standard of living might not be possible now. “You won’t be able to have the same lifestyle you had during the marriage,” Louis says. “And you will likely have to downgrade many things.”
3. Your Soon-to-Be-Ex Objects to Selling Joint Assets
Financial disagreements are often at the root of many divorces, and those issues can persist even after the split is official. If, for example, one ex-spouse doesn’t want to sell one of the marital assets, like the primary family residence, then both of you will still be on the hook for the loan, and your credit will be vulnerable.
“Traditionally, if the husband and wife are both on the mortgage and one party moves out, then whoever is going to remain in the house should refinance the mortgage in their own name,” says Gregory Frank, co-founder of DivorceForce.com.
Generally, with loans or credit products, once the asset has been refinanced in your ex-spouse’s name, your slate is wiped clean, and your legal and financial responsibility is absolved, according to Florida law firm Ayo and Iken.
4. Your Credit Report Has Red Flags for Lenders
Never mind getting back into the dating scene after your divorce and trying to look attractive to new people – you really need to make sure you’re still attractive to lenders. Your ability to stay on top of your bills and avoid too much debt is only part of what lenders consider. Review your credit report carefully and make a plan for how to improve it over time.
“After a divorce is finalized, sometimes people have accrued significant legal bills, child support arrears and penalties and interest for a myriad of reasons,”Frank says. “This can make it virtually impossible to be approved for a rental apartment, a mortgage, a car, even a credit card.”
Frank recommends not taking your attorney’s word 100 percent of the time if the advice could inadvertently sabotage your long-term financial goals. If your lawyer advises you to hold off paying a bill, for example, make sure that you think of the long-term consequences. Not paying could pose a problem for your credit.
Don’t hesitate to contact your credit providers if you have trouble paying your bills; they might be able to work out a payment plan or other arrangement to help you avoid late payments, avoid incurring more debt and keep your credit utilization low. Then, you’ll be more likely to be approved for loans and other forms of credit to help you move on from your divorce.
5. You Rebuild Your Credit After Your Divorce Is Final
If your marriage left your finances in shambles, a divorce could be the best thing to ever happen to you and your credit. It’s a chance to start your personal and financial life over again and make some positive changes. But if you fail to take the right steps, your credit – and your well-being – won’t improve.
A divorce can prompt you to seriously examine your financial future as you re-enter the world newly single, according to personal finance expert and author Harrine Freeman.
If those joint accounts are gone, open new ones in your name and rebuild your credit on your own, Freeman says. She recommends taking the following actions:
- Control your spending
- Create a budget and stick with it
- Track your spending and borrowing to stay out of debt and keep your credit on track
- If your ex-spouse was the one who handled household money matters, take the time to learn about good financial habits and consult an advisor, if necessary
Perhaps the best way to help keep your finances healthy following a divorce isn’t specifically financial at all: “Develop a support network,” Freeman says. “Friends, family, co-workers, church members – join support groups to get advice, support and encouragement that you might not have had previously with your ex-spouse.”