A credit score is an important part of your financial well-being. So, it’s no wonder that many clients ask me whether divorce will negatively affect their credit score. After all, a solid credit score post-divorce can allow for job mobility and financed purchases, while a poor score can limit your options.
The answer to this question isn’t a straightforward “Yes” or “No”.
Divorce is complex to begin with, and there are many misconceptions at the intersection of divorce and credit history. Here are some facts to help you understand the landscape and prepare.
Fact: The act of getting divorced will NOT affect your credit score.
The status of your marriage is not a factor in the score calculation. So, hypothetically speaking, your credit score pre- and post-divorce should not change.
In practical terms, though, divorce can have a tremendous effect on your credit score. However, that has nothing to do with the divorce itself — and everything to do with getting into financial trouble. Here are some examples of situations that can lead to a drop in your credit score.
Mistake # 1: You miss payments
Missed payments can hurt your credit. This includes any bills in your name: mortgage, utilities, credit cards, and more. Consider all the emotional turmoil of divorce, add in having to re-assign autopay arrangements and change banking information, and this is a recipe for missing a payment and not even realizing it. Should that happen, you will have to deal with logistical consequences (i.e. service being turned off, insurance lapsing, account being sent to collections, etc.) — as well as a hit on your credit record.
Mistake # 2: Your ex-spouse misses payments on joint debt accounts
Keeping your joint credit accounts in place and asking your ex-spouse to make payments on them might seem like a good idea. It’s convenient, it’s easy, and if your divorce was mostly civilized, why not save yourself the trouble of shuffling the logistics?
And yet, this is a recipe for a problem. If your ex-spouse forgets to pay the bill (or decides to stop making payments altogether), your credit history is on the line. And the worst part is, you wouldn’t even know it — unless you monitor the status of each joint account closely. Which is why it’s a good idea to complete the divorce with no joint accounts.
Mistake # 3: You make an error on your budget
Your post-divorce budget is not as simple as your pre-divorce budget divided in half. Sure, some expenses may go away. However, many old expenses will remain unchanged. Some new expenses may pop up. Overspending and running up credit cards are all too common — and both can lead to credit score damage.
How can you ensure that divorce doesn’t ruin your credit history?
Here are three things you can do right now to protect your credit score during and after your divorce.
One, separate your finances from your ex-spouse. Make sure you are working from a complete list of joint accounts during the divorce process. Ideally, you want to close them (or remove your spouse as an authorized user). Credit card balances can be transferred over to individual cards, and each spouse should only be responsible for his or her accounts.
Two, work with your financial planner to build a budget. This is not a DIY project! An experienced financial planner will point out expenses you may have overlooked, help judge the reasonableness of your guesstimates, and help you understand how you can make ends meet (and thrive!) in your new status.
Three, build your emergency savings. Without them, any unexpected expense (a root canal, an emergency room visit, your car needing a new suspension, etc.) can upturn your financial boat and force you to carry a credit card balance. Doing so will ultimately hurt your credit score.
Finally, be sure to invest time in monitoring your credit post-divorce. That way, you can catch any mistakes and address them right away.
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