Following divorce, it is possible that your credit will be affected. There are a few reasons this can happen. Some of these you can control, while others you cannot. Importantly, you want to run your credit report to determine if your credit score has changed or become inaccurate so you can take whatever steps may be necessary to minimize any potential damage.
How Are Credit Scores Determined?
There are several factors that make up your credit score:
- Utilization ratio. How much credit are you using compared to the total amount of credit available to you? Ideally, you shouldn’t have outstanding balances of more than 30% of your total credit limit to keep a good credit score.
- Payment history. Do you pay on time and in full? Late and/or missed payments and defaults that show up on your credit report will reduce your credit score.
- Length of credit history. How many years have you been using credit cards, taking out loans or paying off a mortgage? A longer and more diversified history improves your credit score provided you’re paying on time.
- New accounts opened. Have you opened multiple accounts in a short period of time? This can be a red flag because it may indicate that you have an increased need for credit which may make it more likely you will default.
How Can Divorce Affect Your Credit Score?
When you get divorced, your credit score may be recalculated because the factors mentioned above have changed. For example:
Your utilization ratio may be affected because you and your spouse had joint credit cards that resulted in a large credit limit. If you cancel the joint cards, your total available credit will drop and your credit utilization ratio will likely change – particularly if you are carrying a balance. In general, closing accounts will reduce your credit score because your total credit available goes down. The credit card company doesn’t consider why you closed the account, only that you closed it.
In addition to a lower credit limit, you may need to rely on more credit to pay one-time costs associated with setting up your home post-divorce such as buying furniture, appliances and the like. Other expenses may also increase like housing, food, transportation and utilities, which are often less expensive when you’re sharing them with your spouse. Operating two separate households always results in greater costs. Even if you get spousal and child support, you may be spending more money as a single person than a married one and your need for credit may go up. Therefore, your utilization ratio is affected on both sides of the equation.
In issuing new credit, lenders will also reevaluate you because you have only one income in the household instead of two post-divorce. That may make it harder to get a card or result in getting a lower credit limit. In addition, if you need to get more credit cards to pay expenses, opening multiple accounts can also affect your credit score.
With this said, if you pay your balances off each month, you may have less credit available to you but your credit utilization ratio will be unchanged as you won’t be carrying balances from month to month.
What Should You Do?
Unfortunately, divorce can take a toll on your finances and affect your credit. It’s a good idea to consult financial professionals to help you create a budget and financial plan to address debt if that is a concern. It is also important that you work with your spouse wherever possible to resolve issues between you that will operate to keep your legal fees lower and preserve your hard-earned cash. Additionally, you should talk with your attorney during the divorce process about your financial situation and needs. These issues should be part of negotiations in your divorce.
If you are considering divorce, contact us to discuss how we can help you achieve a positive outcome in your case.
