Life often changes when we least expect it, such as going through a divorce. It can affect many aspects of your personal life. But one thing you may not have considered is how it can affect your credit score. Here’s what you need to know about divorce and credit.
Many people suffer credit damage after a divorce, but it’s not because of the divorce itself. Your marital status isn’t included on your credit report and it’s not factored into your credit score. So the physical act of separating from or divorcing your spouse won’t impact your credit score.
Financial troubles can often follow after a divorce, however. Here are three common financial strains that occur after a divorce.
Unpaid joint bills
Many couples have joint credit accounts and someone still has to pay them even after the divorce. Since payment history is the primary factor that determines your credit score, a missed payment from your spouse, whether it be intentional or not, can completely change your credit report.
Often times during the divorce process, the judge will rule that one spouse has to cover specific payments. However, it’s up to you to ensure payments are being paid on time and in full. Even if your ex-spouse is the one who’s supposed to pay them, your name is still connected to the account, therefore their payment history will affect your credit.
Solution: The best case scenario is that you and your ex-spouse are on good terms and can agree upon who’s going to make what credit payments. However, this isn’t always the case. If you’re in the latter situation, the financially responsible thing to do is to make the payments on your ex-spouse’s behalf. Initially, it may seem like the short end of the stick, but you can try to recover the money later by reporting it to the courts. This option also ensures your credit score won’t be damaged.
Loss of two household incomes
During your marriage, you may have been approved for some loans based on you and your spouse’s combined monthly income. After a divorce you’ll become a single income household, but your monthly payment requirements won’t change.
This can lead to missed payments because you may not have the financial means to meet the required monthly amount. Anything less than 100% on-time monthly payments will negatively impact your credit score. In addition to not being able to make payments, you may have trouble adjusting to a life with less income. This can result in people supplementing their income with credit cards, which can both decrease your credit score and limit your financial options.
Solution: We suggest taking the earn more spend less approach. Think about weekly expenses that are unnecessary and you can cut out, such as to-go coffees, cable packages and monthly subscription services. Start by cutting out these items or treating yourself to them only once in a while. If you’re still short on payments, see if there’s a way you can make some additional income. Whether it’s a freelance job or working overtime, it will quickly add up.
Ex-spouse has access to credit cards and loans
As previously mentioned, the ideal situation is that you and your ex-spouse can openly discuss finances once the divorce has been approved. When this isn’t the case and you’re not on good terms, you may forget which credit cards your ex-spouse has access to. This is very common and usually goes unnoticed until it’s too late.
If your spouse is an authorized user on your account, you may not notice their activity on the account until it’s too late. If they’re spending recklessly, you’ll be the one forced to pay for it regardless of the amount.
Solution: The first step is to remove your ex-spouse from your account immediately after the divorce. You can do so by contacting your bank or credit union. Even if you and your ex are on good terms, we suggest becoming the sole user in case things unexpectedly turn sour.
At Birchwood Credit Solutions, we understand life gets in the way of your finances, which is why we look at more than just your credit score. We take into account your month-to-month spending habits in connection with your monthly income. This unique way of viewing credit allows us to approve more applications and at lower interest rates. Regardless of your marital status, we’re committed to working with you to find car finance that fits your budget and lifestyle.
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