How Divorce Impacts Your Credit

Unhappy couple consulting with attorney.

The following is presented for information purposes and is not intended as legal advice or credit repair.

There was a time when credit bureaus would include your marital status on a credit report. And it could be more difficult to get credit from a merchant if you weren’t married or had been married but then got divorced. That’s no longer the case. The Equal Credit Opportunity Act enacted in 1974 makes it illegal for creditors to discriminate based on marital status, and your marital status isn’t part of your credit reports — and therefore doesn’t affect your credit score — anymore.

So technically getting divorced doesn’t have a direct effect on your credit. However, life can be messy, and there are many indirect ways that a divorce could lead to negative items on your credit reports and harm your credit scores.

Unpaid bills can lower your score

A breakdown in communications could result in credit troubles if bills go unpaid. Late payments can hurt your scores, and the impact may increase the longer a bill goes unpaid. After some time, the account may be charged off and sent to collections — additional negative marks on your credit reports that can hurt your scores.

An important thing to remember is that a divorce decree won’t override your responsibility to a lender. Even if a court orders the other person to pay the bills for an account, if the account is also in your name late or non-payments could still affect your credit.

During the divorce, a spouse who is an authorized user on your account, and can, therefore, make purchases but isn’t responsible for the payments, could also leave you with more debt than you can afford to repay. Even when that’s not the case, you may find yourself falling behind if your former spouse paid for most of the household expenses and now you must cover bills on your own.

Your situation may be trickier if you lived in a community property state as loans that either one of you took out may be considered both of your debt regardless of whether you both signed the paperwork. Even when the account isn’t on your credit report, if the debt goes unpaid, the lender may be able to sue you, and a resulting judgment could hurt your scores.

You may struggle to qualify for a new mortgage

A mortgage can be the trickiest credit account to sort out if you don’t decide to sell the home. The person who’s going to take over the house may need to refinance the mortgage in his or her name, but may have trouble qualifying.

If you don’t refinance, you’ll both legally be responsible for the mortgage payments and the person who moves out may have trouble qualifying for a second mortgage to buy a new home.

Closing and opening new accounts can hurt your credit score

A lot of changes might be in order if your financial life was intertwined with your spouse’s. You may have had joint banks accounts, credit cards, loans, or a house together. Even if you pay all your bills on time, you may notice your credit scores start to change as you separate your finances.

Your score could rise or fall depending on the circumstances because a large part of your credit score can depend on the amount of revolving credit (e.g. credit cards) you currently use, as well as the remaining balance on installment loans.

If you close all of your joint credit card accounts and have less available credit, that proportional amount of credit you’re using (your utilization ratio) may increase and your score could drop. Both of your utilization ratios could also increase if either one of you start to rack up expenses on joint accounts.

But perhaps you had joint accounts with a balance, and your former spouse has decided to take over the balance by transferring it to his or her personal account. Or, you may have both decided that dipping into savings and paying off joint accounts is the easiest way to settle the accounts. In either case, your utilization rate may drop, which could help your score.

Your credit may not be top of mind when you’re in the midst of a divorce. But you may still want to address issues head-on, and potentially hire a divorce attorney who could help you avoid pitfalls while sorting out your finances. Doing so could also help protect your money, avoid late fees, and save money on interest charges. Plus, having healthy credit can make it easier to restart your life, as your credit reports can impact your ability to rent or buy a home, get a job, and qualify for credit cards or loans.

If you're heading toward a divorce or on the other side of one and need help sorting out your finances, consider starting with a free financial analysis from MMI. We can help you understand your budget and suggest the best ways to accelerate your debt repayment and put the focus back on what matters most to you.

Tagged in Understanding your credit report, Navigating change

A corporate headshot of Louis DeNicola.

Louis DeNicola is a personal finance writer with a passion for sharing advice on credit and how to save money. In addition to being a contributing writer at MMI, you can find his work on Credit Karma, MSN Money, Cheapism, Business Insider, and Daily Finance.

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