Does Divorce Hurt Your Credit Score?
It’s no secret that marriage comes with a lot of shifts in one’s finances. Many married couples end up merging their finances throughout their marriage, interlacing financial responsibilities between one another. With this in mind, what happens to these shared finances if you end up getting divorced? In what ways can a divorce affect your credit score? In this blog, we will dive into how marriage leads to shared finances, what impact divorce can have, and how to bypass these effects and maintain your credit score post-divorce.
How Does Marriage Merge Financial Histories?
Being married doesn’t inevitably merge your financial history with your partner’s. Your credit scores will stay separated, even if you are married. Additionally, couples are perfectly able to keep their finances separated throughout their marriage. However, as a result of shared expenses, many couples do end up getting joint financial accounts to simplify their bill payments.
These joint accounts can have an effect on your credit score. This is because joint account owners are equally responsible for repayment. If payments aren’t made on the joint account, this will affect both you and your spouse’s credit scores, even if just the one spouse is responsible for payments.
Furthermore, you and your partner are likely to make joint financial decisions together during your marriage. These decisions can include opening additional joint bank accounts, or cosigning for a loan together. Likewise, these decisions would have the potential to affect your credit score. It’s important to be mindful before and during marriage of what financial decisions you’re willing and not willing to make with each other, and what impact these decisions can have.
The Direct Effects of Divorce on Your Credit Score
If you and your spouse have managed to keep completely separate finances throughout your marriage, you won’t see any direct effects on your credit score. Even if you do have partially merged finances, divorce itself does not directly impact your credit score since marital status is not a factor considered by credit bureaus. However, the financial decisions and changes enforced by a divorce decree can affect your credit. These include the division of jointly held accounts, responsibility for debts, and potential financial strains leading to payment delays or defaults.
Joint Accounts and Debt Responsibilities
Joint accounts are often a significant point of concern. If not managed properly post-divorce, these accounts can negatively impact your credit score. You should either close joint accounts or transfer them into one person’s name to ensure that all parties are clear on who is responsible for payments. If you fail to do this, your credit score will continue to be affected by your joint accounts, even long after divorce. As we mentioned earlier, failure by one party to meet payment obligations can negatively affect both parties' credit scores.
The Effect of Alimony and Child Support on Credit
Alimony and child support payments are obligations that can also affect your credit score. Regular payments must be made on time; failing to do so can lead to negative entries on your credit report. For the receiving party, these payments are considered part of your income. This inclusion is significant because it impacts how lenders and financial analysts perceive your overall financial health and stability. Although this may seem like an overall positive, this can backfire if alimony and/or child support payments become inconsistent.
Protecting Your Credit Score During Divorce
To safeguard your credit score during a divorce, it is advisable to:
Monitor your credit report regularly for any unauthorized activities. In doing this, you can identify what financial accounts still need to be separated before your credit report sees any dramatic impacts.
Ensure all bills are paid on time, irrespective of ongoing divorce proceedings. Even if the details of your divorce are largely undecided, credit bureaus will continue to take unpaid bills into account. Discuss a short term plan with your ex-spouse on bill payment, or separate your financial accounts if possible.
Separate all financial ties with your spouse as smoothly and swiftly as possible. The quicker you do this, the easier it will be to manage your financial obligations and know what accounts you are still responsible for.
Post-Divorce Credit Management Tips
Post-Divorce Credit Management Tips
You can begin rebuilding your financial independence by:
Opening individual accounts.
Setting a personal budget that reflects your new financial circumstances.
Being cautious about accruing new debt until you have adjusted to your changed financial situation.
Work with a financial advisor and build a financial plan to continue reaching your goals on a single budget.
Conclusion
Navigating your finances during a divorce is a difficult venture. From sorting through your interlocked finances, to deciding on what to do with your joint accounts, the process can be stressful and time-consuming. But with the right factors in mind, you can ensure your finances and credit score stays stable after divorce.