Going through a divorce can be incredibly stressful, especially if you are worried about your finances. One of the most common questions we get asked during an initial consultation is whether the divorce will hurt their credit.
The short answer is maybe. Divorce can affect the creditworthiness of both spouses. However, the actual impact depends on the terms of your divorce settlement and your unique financial circumstances. Taking the time to become aware of the potential impact because of divorce can help you limit damage to your credit score.
What Happens to Unsecured Credit Card Debt in a Divorce?
Unfortunately, an angry spouse could go on a vengeful shopping spree using joint credit cards. To minimize this from occurring, you could take these steps:
- Make a list of all your credit card accounts. For each credit card listed, note whether it is a joint account, an account that includes you as an authorized user, an account that is only in your name by lists your spouse as an authorized user, or an account that is only in your name.
- Close joint accounts. The issuing bank for your credit card is not a party to your divorce. As a result, the bank is not subject to the terms of your divorce judgment. You have a contract with the issuing bank, and as account owners, you and your spouse are both legally responsible for paying off the balance due. If you really need that specific credit card, call the issuing bank and ask if you can open a new credit card under just your name.
- Remove your spouse as an authorized user. Only the credit card account owner is liable for paying the balance off; however, an authorized user can still use the card and purposefully damage the credit of the account owner. Consider removing your spouse as an authorized user to prevent this from happening. If you are an authorized user on your spouse’s card, ask to be removed from the account.
- Decide how to pay off debt on joint accounts. As part of your divorce, you and your spouse are both liable for marital debt. It would be best to discuss the debt as early as possible during the divorce process and come to an agreement about how much each of you should pay or if the debt should be satisfied from marital property.
- Talk to your lawyer about what to expect. This is where it pays to have a good lawyer. Take the time to discuss your unsecured debt with your lawyer and ask how the Court is most likely to divide the debt at a trial. You will then know what is most likely to happen if no settlement can be negotiated.
What Happens to Our Mortgage During a Divorce?
There are only three ways to address the satisfaction of a joint mortgage at divorce. You buy out your spouse’s equity and refinance the joint mortgage into your individual name. Your spouse buys out your equity and refinances the joint mortgage into his or her individual name. The house is sold, and the joint mortgage is paid off at closing.
Refinancing the mortgage is a good solution if you want to remain in the marital home. As the new mortgage would be in your individual name, you will need a good credit score and sufficient income to get approved for a mortgage.
Does the Divorce Affect My FICO Score?
Credit score algorithms don’t consider income or marital status. However, if you have credit card debt there is a possibility that your credit score could be impacted.
If you and your spouse divide marital debt at divorce, you likely will be making payments based on your individual salary. If you have insufficient income to make the payments, this could mean an increase in your balances due to monthly compounding interest. As the amount of credit you are using is going up and the amount of credit you have available is going down, your credit score can be affected.
Your credit report doesn’t list your marital status or your divorce. Instead, it simply lists the number of active and closed credit accounts. So, if you closed accounts due to the divorce, they would still appear on your credit report for up to 10 years. Those closed accounts also still get included in the average age of your credit history, which is 15% of your FICO score.
How Can I Build Up My Credit?
If you find yourself with little credit in your own name while going through a divorce, there are steps you can take right now to remedy that situation.
- Pay your bills on time. This sounds basic but is very important as payment history is 35% of your FICO score. Take the time to make sure that you can afford the debt you are incurring each month. This includes housing, utilities, auto expenses, insurance, food, clothing, medical expenses, recreation, etc. If you cannot afford your monthly expenses, then you should make changes that can positively affect your credit moving forward.
- Open a new credit card. Decide what form of rewards you want post-divorce. Would you benefit from a cash back card or an airline miles card or a general points card? Take the time to determine which credit card benefit will help you as a single individual. The new credit card will also help you replace the lost credit for accounts closed during the divorce.
- Keep low balances. Try to keep your credit card balance at 10% or less of your total available credit. If you have a balance that is more than 30% of your total available credit, your credit score could suffer. Take the time to look at your current debt and then take the steps necessary to reduce it to build up your credit.
Should you need the advice of an experienced divorce attorney or have questions or concerns about your situation, know that we are here to help and ready to discuss those issues with you.