Does Divorce Affect Your Credit?
Divorce and Credit
Divorce is a life-changing event, and may affect many aspects of your life including your credit. Something you may not have considered though, is how it can affect your credit score. While your marital status by itself is not a direct indicator of your creditworthiness and won’t show up on your credit check, there are several indirect effects from divorce that can cause damage to that oh-so-important number.
Your divorce may leave you with too little capital
- Some divorces are amicable and can be handled in a short time and without a lot of money. Many, however, are not. If your divorce ends up getting dirty, then you may end up or have ended up having to spend a large chunk or a majority of your money on an attorney and legal fees, which end up rendering you insolvent. Or, let’s say that your ex-spouse brought home the majority of the family’s income, then you may now have a problem covering those bills on your own. Late payments or resorting to using your credit cards more are both factors that can lead to a hurt credit score.
Credit companies will look at your payment history first thing, every time, when factoring your credit score. Paying your bills on time is the primary factor to helping maintain a good score, and any late payment can have a detrimental effect on it. Credit companies are looking for 100% on time payments. If that means just paying the minimum payment for now, then do it if you can. Minimum is better than late.
Additionally, credit companies are looking at your debt-to-credit ratio. They want to see that while you may have credit available, you’re not racking up huge bills that will take tens of thousands of dollars to pay off. An easy example would be saying you have 5 credit cards, all with $20,000 limits, and no other debts or credit. Those five credit cards give you $100,000 of available credit. Now, let’s say that 3 of those cards are maxed out, and the other two cards have a zero balance. That means you have $60,000 in credit card debt alone, giving you a 60% debt-to-credit ratio. This is not ideal, and shows that you may be a risky creditor, which will affect your credit score. Credit card companies are looking for you to have 30% or less debt-to-credit ratio, and being at that range can help improve your score. So, try and keep your credit card in your wallet, if you can.
You have joint bills, but your ex-spouse is refusing to pay
Joint accounts can be tricky. Often times, your mortgage, car payments, credit cards, etc., are in both yours and your ex-spouses name. Normally, a judge in Florida divorce court will rule that you have to pay for A, B, and C, and that your ex-spouse will be paying for X, Y, and Z. This is great in theory, but in reality, you will need to make sure that is what actually ends up happening.
Some people aren’t too concerned with their credit score. It’s true, while certainly hard to believe. If your ex-spouse is one of those people, then there’s really no incentive for them to pay bills on time, and if those bills are unsecured bills or secured bills with assets with your name on it, then you may be in for a bad time.
Now, hopefully, you and your ex-spouse will hold up your ends financially, and everyone can go their separate ways in peace. If not, then you have to make sure to make those payments as well. You can work on recovering that money later by reporting it as nonpayment to the courts. Don’t let it hurt your credit now, and your local Florida divorce lawyer may be able to help assist you with recovery.
Budget, budget, budget
There’s an old adage that says “Failure to plan is planning to fail.” This is especially true in divorces. You’re most likely going to move from a dual-income family to a single-income budget, and that’s going to change your spending. You’re going to have to sit down and really look at the books, and make some tough choices. Make sure to plan out your big expenses first: mortgage, insurance, taxes, rent. Make sure to think about a security deposit or renters insurance if you end up getting a new place. Your cell phone and utilities will be in this big expenses category as well. After that, start planning out your credit cards, car payments, any personal loans, or anything else that has to be paid every month. If your income isn’t within your budget, then it’s time to start looking at ways to cut costs. It may be time to give up cable and stick to just Netflix and Hulu for a while, and it may be time to start packing a lunch instead of going out every day to the sandwich shop down the street.
Too many people plan to fail here. If your budget isn’t right, then you’re at risk of missing a payment. Miss a payment, and your score falls. Rack up card debt, and your score falls. Planning your budget can help avoid much of this.
And finally, remember that there’s no sure fire way to avoid your credit-ability being hurt. Divorce itself does not hurt your credit, but there are many indirect causes that can affect it. If you plan ahead and make sure that your ex-spouse is paying what they need to pay, then both of you can come out on the other side relatively unscathed.