Divorce can seriously damage your credit score, especially if you are female
For many people, divorce is a difficult and painful experience.
The process of dissolving a formerly romantic marriage, making new life arrangements, and separating common finances can be complicated. If you are a parent, dealing with child care issues can be even more difficult.
In the midst of the chaos of a divorce, people often tend to neglect their credit. Unfortunately, this is a big mistake.
When you fail to protect your credit during a divorce, your credit scores can suffer. And, if your divorce is bad for your credit, these issues could haunt you for years to come.
How divorce can hurt credit scores
Let’s start with the good news. Divorce does not automatically destroy your credit scores.
In fact, you don’t have to worry that the divorce itself will hurt your credit. Your marital status is not reflected on your credit reports and it has no direct influence on your scores.
Yet, it’s no secret that divorce and credit issues often go hand in hand. Here are two reasons your credit scores may drop during a divorce:
1. Creditors do not honor divorce judgments.
Unraveling joint finances and accounts is a complicated part of divorce. If your divorce is complicated, the separation of joint accounts can become a nightmare.
When you divorce, the court will make a decision known as a divorce decree. Your divorce decree details the division of your marital property and debts, including which spouse is responsible for paying each creditor.
If you have a common car loan, for example, your divorce decree will tell who keeps the vehicle and who is responsible for the loan payments.
There is just one problem. Creditors and debt collectors do not honor divorce judgments. If a judge orders your ex to pay off a joint credit obligation, but he doesn’t, your personal credit could suffer.
2. Joint accounts stay on your credit reports.
Whenever you initially open a joint credit obligation with your spouse, the account may be added to both of your credit reports with Equifax, TransUnion, and Experian (depending on the lender’s policy).
Divorce does not dissolve the joint accounts you opened with your ex, nor does it remove them from your credit reports. Your lender will always expect you both to pay back the money you borrowed, plus interest, as you originally agreed to. The account will also remain on your credit reports, regardless of who is responsible for it in your divorce decree.
Here is why this can be a problem. If your ex is responsible for making payments to a joint account and is paying late, the late payment will appear on your credit reports and could damage your credit. If a jaded ex-spouse decides to make a bunch of fees on a joint credit card account, you will still be responsible for paying the debt. In fact, a high credit utilization rate on a joint credit card could hurt your credit rating and that of your ex, even if all payments are made on time.
The easiest way to separate joint accounts is to cooperate with your ex and find a solution that protects each of your credit reports. Of course, depending on whether your separation was amicable, this may or may not be a realistic expectation.
Why divorce could be harder on women’s credit
As mentioned earlier, divorce has no direct impact on your credit reports or scores. Besides, your gender has no impact on your credit either. The Equal Credit Opportunity Act (ECOA) strictly prohibits lenders from using credit scoring systems that discriminate on the basis of age, race, religion and – you guessed it – gender.
However, divorce can have an indirect impact on your credit because of the financial challenges it can bring. Women in particular can be disproportionately affected by financial hardship during a divorce.
One of the reasons that divorce can potentially hit women in the finance department so hard is that women on average earn less than men. The Bureau of Labor Statistics reported that the average full-time weekly wage or salary for men was $ 991 in the fourth quarter of 2018. Women, in comparison, earned an average of $ 796 during the same period, almost $ 200 less per week than their male counterparts.
Statistics from the US Census Bureau show that women who divorced in the past year report lower family income than recently divorced men.
A survey commissioned by Experian also reveals revealing results on the impact of divorce on men’s credit compared to women. According to the survey, 54% of divorced women report that their credit score has declined during their marriage. About 50 percent of women surveyed also said their ex had ruined their credit.
How to protect your credit during a divorce
Every divorce is different. Untangling your credit obligations from your ex-spouse is complicated, regardless of your gender.
Ultimately, it’s up to you to try and protect your credit from damage during a divorce. These three tips might help.
- Close common credit cards and remove your ex as an authorized user from all credit cards opened in your name only.
- Freeze your credit reports with all three credit bureaus to prevent a vindictive ex-spouse from opening fraudulent accounts on your behalf.
- Cooperate with your ex to separate joint accounts when you can. For example, if you have a joint mortgage, the spouse who keeps the house may be required to refinance the loan on their behalf only. Another option with joint loans (like mortgages and auto loans) is to sell the asset (like house or car) and use the profits from the sale to pay off other joint debts.
- Open your own bank account. To protect your new finances, consider opening a new checking and savings account with an online bank. Online banking can be convenient and tend to have higher interest rates on savings than traditional banks. For example, an online savings account with A capital letter offers 10 times the national average for all balances and has no minimum balance requirement.
Are you looking for ways to protect your credit during a divorce? here is 5 other tips which might help.
Sometimes credit damage in a divorce is inevitable. If you’ve been a stay-at-home parent, for example, and suddenly you need to find a job, it may take a little while to get back on your feet financially. Your creditors, however, will not wait for their payments.
Late payments, overdue accounts and collections can all have an impact on your credit. In severe cases, you may even need to seek protection from your creditors during or after a divorce.
If you’ve suffered credit damage as a result of a divorce, here’s the good news. Your credit can be replenished over time. You should do your best to protect your credit in a divorce if you can, but know that you don’t have to be stuck forever with damaged credit if the worst should happen.