Divorce can lower your credit score, but you can take steps to minimize the damage to your credit profile. Getting a divorce and separating your finances can be an emotionally charged process. It is vital to be sure you consider all the essential factors because potential oversights could significantly affect your future. Knowing how divorce impacts your credit score can help you feel empowered to take manage your finances as an individual.
The divorce attorneys at Terry & Roberts can help you navigate your divorce’s complexities and work to protect your rights and best interests. If you have specific questions regarding how divorce can impact your credit score, get in touch with our team for a case consultation to see how we can help.
5 Factors That Determine Credit Scores
Before looking at how divorce may impact your credit score, you must know how a credit score is determined. This number reflects your current credit and debt situation based on past actions and uses an algorithm to reflect the risk you present to lenders. Three reporting bureaus, Experian, Equifax, and TransUnion calculate industry-standard credit scores such as FICO or VantageScore. Their algorithms can differ in how they weigh various factors, but overall, your credit score should reflect a similar snapshot of your overall credit health.
Five main factors help determine this credit score:
- Payment history: This examines how you have made payments on your credit and loan amounts over time and tends to be a significant factor in all credit scores. It is essential to make payments consistently.
- Amounts you owe: This looks at the amount of money you have in outstanding debt in various ways. It will examine your debt ratio compared to the lending limit, so people with a higher net worth can typically have more outstanding debt without penalizing them.
- Length of credit history: This is based on how long you have had open lines of credit or loans. The longer you have had an open line of credit, the less risk you are deemed to have, especially if you continue to make payments consistently.
- New credit lines and inquiries: Your score can decrease every time you apply for credit. Some exceptions are less damaging, such as obtaining a mortgage, student loan, or car loan, which will only count as one inquiry if your inquiries with multiple lenders are made within a specific time period.
- Types of credit used: A diversified credit profile shows that you can responsibly use different types of credit.
Reasons Your Credit Score May Change After a Divorce
While divorce proceedings can be costly and complicated, they do not directly affect your credit scores, however you may see your number decrease after splitting your finances for a few reasons. After a divorce, a few financial changes and possible oversights can lower your credit score. With guidance from a knowledgeable divorce law attorney, some of these factors can be mitigated to lessen the potential damage to your score.
Changes to Your Income and New Credit Applications
Your finances will likely change following a divorce due to adjusting income flow. Whether you’re transitioning from a dual-income household to a single income, managing expenses independently, or taking on new financial obligations like alimony or child support, your financial situation can be affected. This difference in income can limit your ability to make on-time payments or to make partial payments.
It can also increase your credit utilization ratio. This is the amount of money you owe on your cards divided by the total credit limit. Your credit score could be hurt more as your credit utilization ratio gets higher. Credit reporting companies use this to determine how well you manage your finances.
After a divorce, you may need to apply for additional credit cards or loans or request an increase to your credit limit. Depending on how those inquiries were handled, these factors can affect your credit score.
Joint Debt, Closing Accounts, and Missed Payments
If you still have joint accounts, including credit cards, installment loans, or mortgages, missed or late payments will appear in both spouses’ reports. Splitting up accounts during the process of the divorce may cause a dip in the credit score as well, as you will have to open and shut credit accounts.
This may cause you to reconsider shutting those joint accounts. However, you must consider that if your ex cannot pay those debts for whatever reason, you could still be held liable by the creditors if your name remains on a shared account.
Disreputable spouses may also attempt to file for new joint debt without the other’s knowledge or consent, which could affect your report. Working with a divorce law attorney from Terry & Roberts can help prevent such issues by creating a thorough plan to separate your finances, block any attempts to mar your credit score, and help you avoid any common financial mistakes.
Take Action to Limit Harm to Your Score After a Divorce
As a part of the divorce, you should start by reviewing all assets, debts, and joint accounts you share. While working to negotiate splitting up assets and debts, make it a priority to shut these joint accounts or remove yourself as an authorized and liable user. Negotiating asset and debt division is a common step with most divorce proceedings, but taking this extra step will help mitigate risk for your future credit.
Continue to maintain on-time payments and do your best to make your payments in full. While negotiating your division of assets and debts, it can be helpful to seek guidance from a financial planner. They can determine the amount of debt and payments, such as rent or a mortgage, that you can take on as an individual with your sole income. This will ensure you can continue to make your payments in full without penalties for partial payments.
Continue to manage your credit utilization ratio to your card balances low and avoid possible impacts. Regularly check your credit score to establish that no new lines of credit have opened in your name without your permission. If errors show up on your credit report, you may dispute any inaccuracies that you find. Even if you are unable to dispute them, it will help to minimize damage to your score by catching them early. With these steps, you can minimize a divorce’s negative effect on your credit score and strive towards a solid financial future on your own.
Concerned About the Impact Divorce Could Have on Your Credit Score? Contact Terry & Roberts Texas Divorce Law Attorneys
Get help protecting your rights through your divorce and dividing your finances. Do not overlook the potential impact on your credit score. Our legal team understands what you are going through and how to protect your financial well-being during your divorce and create a clear and documented plan for your strategic debt division. We may even be able to negotiate on your behalf for lower interest rates and close joint accounts with creditors.
Our legal team prioritizes your financial future throughout the divorce process, providing you peace of mind. We work diligently to ensure that you get fair treatment and strive for the best possible financial outcome for you. Contact our team for an evaluation of your divorce and economic situation and get started on your next chapter.