Is Divorce Harming Your Credit? | Credit card


Going through a divorce is incredibly stressful, especially if you’re worried about your finances. Most people want to know if the divorce is hurting your credit.

Divorce can affect the creditworthiness of both partners, but the impact depends on your financial situation as well as the details of your divorce agreement. Being aware of the possible impact of a divorce can help limit the damage to your credit score.

What happens to credit card debt during a divorce?

It’s not uncommon for angry spouses to go on a revenge shopping spree with credit cards. But even if your divorce is civil at the moment, you still need to follow these steps:

  • List your accounts. Note joint accounts, credit cards that include you as an authorized user, accounts that you own alone but list your spouse as an authorized user, and accounts that you have just in your name.
  • Close joint accounts. Credit card issuers do not consider your divorce. You have a contract with them and as account holders you are both legally responsible for repaying the debt. If you need the credit card, ask your issuer if you can open a new credit card just in your name. The success of this strategy depends a lot on your own creditworthiness.
  • Remove your spouse’s authorized user status. The account holder is responsible for paying the balance. But an authorized user can damage the account owner’s credit. Remove your spouse as an authorized user. If you are an authorized user on your spouse’s card, request to be removed.
  • Choose a debt elimination strategy for your accounts. For credit card accounts you own, it’s your job to pay for it. The amount will not change in the event of a divorce, but paying off your debt will increase your credit score. If your spouse got into debt as an authorized user, ask your spouse to pay you back. It might not work, but it doesn’t hurt to ask.
  • Decide how to pay off debt on joint accounts. You are both responsible for the debt, so agree on how much each of you should pay. Some split it in half, but others can identify who incurred what expense.
  • Find out how your state handles debt in divorces. This is where it pays to have a good lawyer. States vary in how they view the debt of divorcing couples. When deciding how much to pay each, consult your lawyers so you follow the law. This step also nudges a spouse who is reluctant to pay their share of the debt burden.

How to manage your mortgage during a divorce

Being a landlord complicates divorce, but the situation can be managed effectively. Your options vary depending on whether you want to sell the home, let your spouse buy out your share of the home’s equity, or stay in the house alone.

Mortgage refinancing is a good solution if one of you wants to stay in the house. The new mortgage bears either your name or the name of your spouse. The person staying in the home would need a good credit rating and enough income to get approved for a mortgage.

If there is equity in the home, whoever will be applying for a new mortgage can apply for a cash refinance. This means that the spouse who is no longer on the mortgage (or title) can receive a fair share of the equity.

If neither you nor your spouse qualifies for a mortgage on your own (or if neither of you want to stay in the house), you may have to sell it. Also get tips on taxes so you don’t have any unpleasant surprises at tax time.

How Divorce Affects Your Credit Score

The good news is that credit score algorithms don’t take income or marital status into account. But if you have credit card debt, your score may be affected.

If you split the debt, you will make payments based only on your salary. Unless you have sufficient income, this could mean an increase in your balances since you are paying compound interest. This causes your credit utilization ratio to increase, which is the amount of credit you have used compared to the amount you have. This situation can lower your credit score.

Also, by closing certain accounts, you could decrease the amount of credit you have, which increases your ratio and, therefore, lowers your credit score.

It’s not impossible to get a divorce and have minimal impact on your credit. But that depends on divorce settlements and any credit card debt that you have to start paying off yourself.

How Divorce Affects Your Credit Report

Your credit report does not list your marital status, so your divorce is also not listed on your report. What will change is the number of active accounts.

If you closed accounts due to divorce, they will still appear on your credit report for 10 years. So the accounts are always included in the average age of your credit history, which is 15% of your FICO score.

As already mentioned, you lose available credit associated with accounts you have closed. This can lower your score if it increases your credit utilization rate beyond 30%.

Ways to build your credit history

If you find yourself with little credit in your own name, you can take steps now to remedy this situation.

  • Pay all your bills on time. Payment history accounts for 35% of your FICO score. Do whatever it takes to make timely payments, such as setting up automatic payments, email reminders, or text alerts.
  • Open a new credit card. Decide what kind of rewards you need in the future. You will most likely have different needs as a single person in a new life situation. The added benefit is that if you have previously closed accounts, it helps you replace lost credit. It is therefore also a step towards improving your credit score.
  • Maintain low credit utilization ratios. If you have a ratio above 30%, your score will suffer. To really increase your score, keep it below 10%. Credit scores take into account your ratio on each individual card as well as the total ratio on all your cards. You cannot therefore accumulate debt on a single credit card, as this will always have an impact on your score.
  • Get a secure credit card. If you can’t qualify for an unsecured card, apply for a secured credit card. This involves making a deposit into an account to secure the card. This decreases the risk for the credit card issuer. Use the card responsibly and you will increase your credit. When you’re ready to switch to an unsecured credit card, you’ll get your deposit back.
  • Check out a credit builder loan. If your divorce has resulted in a credit disaster for you, such as bankruptcy, it may be difficult to get a credit card right away. Consider getting a credit builder loan as a stepping stone to a secured credit card. These loans vary by bank and credit union, so read the terms carefully to find out how a particular loan works and what is required of you. It takes time to build good credit, but you will get there.

Source link


Comments are closed.