Will a Divorce Hurt My Credit Score?

There are a lot of things to consider when going through a divorce. In addition to the dramatic changes to your day-to-day life, your finances will also change significantly. Separating your finances and dividing your shared assets and debts can be a complicated, confusing process. To maintain good financial health, it is important that you thoroughly review your financial situation post-divorce and understand how a divorce can affect your credit.

Your credit report does not reflect your marital status, and therefore it will not note that you’ve become divorced. Though a divorce won’t directly affect your credit score, financial issues associated with your divorce can.

Three post-divorce issues that can negatively affect your credit include:

  • Shared debt and joint accounts
  • Problems with co-owned property
  • Post-divorce financial strain

Keep reading to learn more about these three issues and how to protect your credit and your financial health post-divorce.

Shared Debt & Joint Accounts

Most couples have combined finances. This means that they have shared accounts, including bank accounts, mortgages, and credit card accounts. During a divorce, you and your spouse will not only divide your shared assets and debts, but you will also separate your finances. However, in some cases, this is not as easy as removing someone’s name from an account.

In cases of shared debt, you may not be able to remove your name from the account until the debt is paid off and the account officially closed. During property division, the court may name one person responsible for a specific debt, or you may both be liable. When this happens, you are dependent on the other person making timely and correct payments. Failure to do so can negatively affect your credit.

Credit card companies and banks do not care what is stated in your divorce settlement, and they are not obligated to adhere to it. If you are named one of the responsible parties for the debt, they can come after you for the owed money, even if your former spouse is named responsible in your divorce agreement. If you shared debt or have other joint financial accounts with your ex-spouse, you must keep track of those accounts regularly. Do not assume that your former spouse will handle everything. The sooner you know of a problem, the sooner you can deal with it, and the more likely you are to avoid a negative mark on your credit report.

Co-Owned Property Post-Divorce

While most of a couple’s assets will be divided during the divorce process, there are situations in which a couple may continue to own property together post-divorce. For example, if the couple owns a house, but neither can buy the other out, and the market is not favorable to sell the home, they may remain co-owners until they can sell the property. Co-owning property post-divorce is not ideal, especially if the couple still has a mortgage on the home.

When both parties are named on the mortgage, there is the potential for their credit to be negatively affected. Just as with credit card debt, one or both parties may be named responsible for making the mortgage payments post-divorce. If a payment is missed or the property moves into foreclosure, the credit of both people named on the mortgage will be affected.

Additionally, as long as you are associated with the loan, it will show up on your credit report and may impact your ability to get other loans or credit accounts in the future. Having your name removed from the mortgage is not an easy process. Many times, couples qualified for the loan together, and so the bank may be reticent to remove you or your former spouse. Typically, your only options in this situation are to pay the loan off, refinance, or sell the property.

Post-Divorce Financial Strain

After a divorce, you are going from a joint household with shared expenses to being responsible for all household expenses on your own. If you and your spouse both worked outside of the home, your income level will also be significantly reduced. Even if you receive spousal support, this adjustment can be very difficult. Furthermore, the divorce process itself can be very expensive, depending on the nature of your divorce and how long it took to reach a settlement agreement. All of this can put a strain on your finances.

In response to this financial strain, you may find that your lifestyle has to change. For example, you may find that you need to budget differently to accommodate your new housing and living expenses. It is not uncommon for people to seek out new, better employment opportunities or relocate. If you were a stay-at-home parent and need to re-enter the workforce, you will also have new childcare costs to factor into your budget.

Adjusting to your new life post-divorce is not an easy process, especially when it comes to your finances. To protect your credit post-divorce, it is important that you carefully track your finances and keep a good record of all financial accounts, especially those that are still associated with your former spouse. If you are able, you may also wish to consult with a financial advisor for guidance.

To learn more about how to protect your credit post-divorce, review our blog here.