Divorce is an unfortunate reality for many Americans. While the divorce rate in the United States has consistently fallen over the past 30 years, nearly 3 out of every 1,000 people will legally separate from their spouses at some point in their lives. Sadly, divorce can be excessively ugly, costly, and detrimental to your finances if you aren’t careful. The truth is, once you’re married, your financial lives as a couple become legally intertwined, and when you get divorced, they can be very tricky and difficult to untangle, particularly from a credit standpoint. Joint purchases, credit cards, and loans acquired during the marriage can still harm you credit-wise long after the divorce papers are signed and finalized. Hence, if you’re currently going through a divorce, it’s important to be aware of how your divorce can affect your credit score so you can mitigate any negative impacts. Here are four ways that divorce can affect your credit score.
1. Ex-Spouse Doesn’t Pay Joint Credit Cards on Time
If you have settled in court who is going to pay which credit card bills after the divorce, it’s important to make sure your former spouse pays those debts on time. If payments are late or not paid at all, it could harm your credit score regardless of whom the court deemed responsible. Creditors could care less if you’re divorced or not – they want your debts paid on time. To protect yourself from this type of scenario, make sure you have a sufficient emergency fund in place that would allow you to step in if necessary and make payments for some time so you can avoid late penalties or negative credit remarks. You can then try to recoup those costs in court if need be, which, while not ideal, would at least avoid damage to your credit.
2. Insufficient Credit History
In a marriage, it’s common to have one spouse with a better credit score than the other spouse. As a result, many married couples end up using the better credit score for all their borrowing needs, but this can negatively impact the spouse with unused credit by leaving them with insufficient credit history. For example, let’s say you married relatively young and everything was in your spouse’s name because you stayed home to raise the children. In this scenario, you likely have a limited credit history and a much lower credit score, which could prevent you from obtaining the loans or higher credit limits you may need later on to buy a house or purchase a car. If this sounds like you and your ex-spouse handled all the finances, use this as an opportunity to educate yourself. Consult the Consumer Financial Protection Bureau for help. The CFPB is a government-run website that has all sorts of helpful consumer tools and resources that can help you gain a better understanding of these financial matters, particularly regarding credit scores.
3. Reduced Credit Limits
After a divorce, you’ll likely be separating any joint credit card accounts you shared. If you weren’t the primary breadwinner in the marriage, this separation will also probably mean a much lower household income, which could affect your credit score and reduce the credit limits available to you. If you’re carrying a revolving balance on some of these cards, the reduced credit limits will increase your utilization rate and the reduced household income will increase your debt-to-income ratio, all negatively impacting your credit score. If this is a real concern for you heading into a divorce, we recommend you start building credit on your own away from the marriage and pay off any previous balances you may have been carrying.
4. Not Paying Your Own Bills on Time
The financial strain of divorce can also lead to paying your own bills late once you discover that your income alone doesn’t stretch far enough. That reality can be harsh to adjust to at first. In many cases, it may mean overhauling your entire lifestyle to live within your means. We recommend creating a new budget you can stick to that will help you get in the habit of paying your bills on time and planning your new reality post-marriage.
Unfortunately, divorce is a highly emotional time filled with many important financial decisions that will affect your future. If you are struggling to figure out the best way to proceed forward with the confidence you seek once you’ve dissolved your marriage, schedule a time to chat with us because we can help. We’ll help you sort out your financial life and plan for your new future ahead.
Forefront Wealth Partners is an independent financial advisory firm that provides creative problem solving to our clients. In a world where change is accelerating and the future uncertain, we provide simplicity and confidence concerning financial, tax, and legal strategies. Our process involves a deep relationship, focusing on meaningful outcomes and dynamic planning.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP’s express prior written consent.
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