Divorce is a major decision and one that can have an impact on your entire life, including your finances. To start, divorce can be expensive. Yes, you may need to pay a lawyer, and that can get costly if your divorce drags on in court. However, there are other expenses associated with divorce, including potentially getting into a new home, buying new things to replace those your spouse kept, or dealing with issues of debt and credit.
Find out more about divorce and credit repair below, including how you can proactively protect your credit when you’re ending a marriage.
Note: We aren’t divorce attorneys. This article provides some general advice about dealing with credit following divorce. Consult with your divorce lawyer for specifics related to your situation.
In This Piece
- How Can Divorce Affect Your Credit
- Divorce Decrees and Your Debt Obligations
- Filing Taxes After Divorce
- Credit Repair After Divorce
- How to Protect and Rebuild With Credit Repair After Divorce
How Can Divorce Affect Your Credit?
Credit reports don’t keep an accounting of your marital status. Your status as single, married, or divorced doesn’t have a direct impact on your credit rating. But what happens with your finances after you divorce can drive a good credit score to bad. Divorce can impact your credit in a lot of ways — here are a few to keep an eye on.
Consider a scenario where you and your spouse share two credit card accounts and decide to each pay one off after the divorce. It seems like a fair way to split up your credit card debt, but what if your spouse doesn’t follow through with their end of the deal? Any late payments or defaults are reported on your credit history, too, because you’re still legally responsible for the debt. Their missed payments could put a ding in your credit score.
You could also run into an issue with your credit utilization. Your credit utilization accounts for about 30% of your credit score, so it’s good to keep a close eye on it.
If your ex agrees to take on a shared debt, that debt will still show up on your account as owed unless you’re completely removed from it. That means if you attempt to get new debt while those old accounts still show high balances, you could be declined — even though you personally no longer use those accounts.
Account History and Mix
If you close older shared accounts or your ex assumes complete control of them, you could lose out on that credit history and credit mix on your credit report. Closing older accounts could shorten your total credit age, which accounts for about 15% of your score. And if you close your only account of a certain type — say, you pay off your mortgage loan after selling the house and now all you have are credit card accounts — your credit mix could suffer.
When you’re married and apply for credit together, both your incomes are considered. As a single person after divorce, you only have one income. If you still have a lot of shared debts from your marriage listed on your credit report, that can bring up your debt-to-income ratio, making it harder to get approved for some forms of credit. That may be true even if your spouse has agreed to pay the debts and is paying them.
Divorce Decrees and Your Debt Obligations
A divorce decree or order often includes language that lays out how you’ll divide assets or custody of children. In some cases, it can include a written agreement between spouses about how debt will be handled or split.
Many people think a divorce decree stating the other person will pay a debt is a legal get-out-of-debt card, but it’s not. The bank didn’t agree to let you out of the agreement, and it’s not likely to be motivated to change it even if your spouse ends up defaulting on the debt for any reason.
That doesn’t mean you can’t agree during the divorce process to divide and conquer your debts. It does mean, however, that you leave yourself open to future credit risks should your spouse become unable or unwilling to hold up their end of the bargain.
Filing Taxes After Divorce
Another financial area where your spouse and you may have to cooperate after divorce is taxes. If your divorce is finalized after December 31 of the previous year, you can still file a joint tax return. It may be worth considering whether a joint tax return is financially beneficial for you both.
If you have children, only one person can claim each child as a dependent on tax returns. If you’re the primary custodial parent, you might always claim the child. Some people choose to alternate tax years for claiming the kids. Either way, it’s important to communicate about these things to avoid issues with taxes in the future.
Again, we’re not lawyers or accountants, so definitely consider talking to professionals about post-divorce tax questions you may have.
How to Protect and Rebuild With Credit Repair After Divorce
If a court order doesn’t offer some peace of mind when it comes to your post-divorce credit rating, what can? Fortunately, there are several steps you can take to protect your credit score and credit history and repair any damage that occurs during the divorce process.
Learn More About How Credit Scoring Works
Start by ensuring you know how credit scoring and reporting works. When you understand what goes into your credit score, you can take proactive steps to improve those areas of your finances and protect them during divorce. The free credit report card from Credit.com breaks down your credit performance into five key areas and gives you a letter grade score in each. That helps you understand exactly what part of your financial life might need some work.
Start Monitoring Your Credit Reports and Score
Arm yourself with details about your own credit. Getting a copy of your credit report lets you see what information is on it and what you may need to contend with before, during and after a divorce.
It may be a good idea to get your credit reports before you start divorce proceedings. That way, you have a more complete picture of what accounts and information are in your name. If you and your spouse are going through a civil divorce, you can both gather this information and share it with each other as you plan for the future and separate financial lives.
Pay Off and Close Shared Accounts Whenever Possible
The best protection you and your spouse can have is closing shared accounts completely and paying them off. You can do this by refinancing them with loans in your individual names or by cashing out shared savings to pay off debts before the divorce process is finalized. In some cases, you can even make this part of the official divorce proceedings and requirements. When you don’t owe money together, you can’t impact each other’s credit score in the future.
Note, however, that closing a lot of accounts does impact your credit mix and age, and that can lead to a temporary drop in your credit after your divorce. It’s not as big a hit as what seriously late payments or collections would bring, though.
Work Together to Create a Plan for the Remaining Shared Accounts
It’s not always possible to close or refinance all your debt, especially immediately. Neither spouse may be in a position to buy the other out of a mortgage, for example. In cases like this, it’s important to work together if you can to manage finances. Take steps such as making sure you both have access to online accounts to pay bills and encouraging your spouse to use automatic payment options to make it less likely a bill is forgotten.
Pay Your Own Bills on Time
You can’t control everything your ex does after a divorce, but you can manage your own finances as well as possible. Take time to understand your own income and expenses and create a smart personal budget to rebuild your money situation after a divorce.
Protect Your Identity
When your divorce is amicable, you’re able to work together to solve some of these financial challenges and make sure you can both move forward securely. Unfortunately, that’s not always the case. If your split was contentious or you don’t trust your former spouse not to take out loans or credit cards in your name, consider freezing your credit and putting other identity theft protections in place.
Take Actions to Repair Your Credit If Necessary
Once you’re divorced, keep checking your credit report. Take actions to dispute inaccurate items that show up on your reports — such as new accounts for your ex that shouldn’t be hitting your credit history.
Getting divorced can take a lot of your time and energy, as can starting the next chapter in your life. You can work with professional credit repair organizations that dispute errors for you and help you keep track of your credit situation.
Divorce Is the Beginning of Your New Financial Freedom
While there are a lot of details to deal with, divorce can bring a lot of financial freedom. Rebuilding financially after divorce takes time, but when you educate yourself about debt and divorce and start taking small steps as soon as possible, you can get through the process and enjoy your next chapter of life sooner.