Can Divorce Negatively Impact my Credit Score?
If you are facing a divorce, there is a lot of uncertainty about the future. You are likely starting to think about what it will be like being single again. How will you pay the bills? Can you keep the marital home? What will happen to the family cars, the assets, and who will have custody of the children?
Divorce can bring up so many emotions, worries, stresses, fears and even anger, and one of the most common worries of those going through divorce is whether or not the dissolution of their marriage will have an impact on your credit score. The simple answer to this question is – your credit score may be impacted by divorce, but any impact it has will be indirect.
No Direct Impact
Divorce has no direct impact on your credit score. Why? For starters, loan applications and other financial documents do not ask you if you have ever been divorced. They only ask if you are currently married. The same goes for when credit reporting companies compile your credit information. Credit reports do not factor in whether or not you are divorced in calculating your credit score. The bottom line here is that divorce does not play a role in your creditworthiness in the eyes of lenders. Despite there being no direct impact, however, there are a number of ways in which divorce can indirectly affect your credit score.
Dropping to One Income from Two
Did your household rely on two incomes during your marriage? If so, dropping from two incomes to one may adversely affect your creditworthiness. Once the divorce is finalized, you might need to refinance an auto loan or a mortgage. Doing so with just one income can hurt your chances at refinancing or even acquiring new loans or lines of credit.
Refinancing the Marital Home
Couples that get divorced often need to refinance the marital home so it can be put in just one of the spouse’s names. Going through a refinancing will lead to a hard pull of your credit and can add a lot of debt to one person. This is one of the reasons why many divorcing couples choose to sell the marital home during a divorce and divide the money from the sale, although this is not always a desirable or even practical option.
Debt Split Was Not Even
It’s not out of the realm of possibility that one spouse took on more debt than the other when the divorce was finalized. This can happen for a variety of reasons, and when it does, it can hurt your credit score. Having a relatively high amount of debt with a significantly lower income is a combination that lenders do not like.
Access to Financial Accounts
Have you failed to remove your former spouse from credit cards and other financial accounts that are in your name? This is an accident waiting to happen that can seriously impact your credit score. You need to remove your former spouse from all of your accounts immediately. If they still have access, they can run up high credit card balances without consequence and leave you holding the bag.
Failing to Disclose All Debt
During the divorce process, both spouses are required to disclose all of their assets and debts. This helps determine how the marital estate will be divided. Not every spouse will be truthful with the debt they have in their name. This is why credit reports should be run for both spouses during the divorce process. It will show all the credit accounts that you and your spouse have, which will help ensure that your spouse did not open a secret account in your name and run up a large credit card balance without you knowing it.
Taking Control of Your Finances After a DivorceDivorce can make a person feel lonely and isolated. At times, you might feel like crawling into bed and never leaving. Thus, having a set of people you can turn to for help is vital. As you develop a team, consider each facet of your life-because a divorce impacts every aspect of a person’s life.
- Identify a trusted friend or family member you can speak with for emotional support.
- Ask a work buddy to accompany you for walks on your lunch break.
- Engage a divorce lawyer who understands you and can offer sound legal counsel based on your circumstances.
- Tell your certified public accountant (CPA) or financial planner about your current situation as they can help you make solid decisions about your finances at this time.
- Meet with your insurance agent and understand the different options for life, home, vehicle, or other plans that you require moving forward.
Set-up a time with a social worker, counselor, or minister to talk about things that you are hesitant to discuss with anyone else in your life.
Next, compile a list of what needs to be done. Every task does not need to be completed immediately, and you may learn from your team that certain things don’t need to be done at all. You might want to add the following things to your post-divorce financial plan:
- Collect all financial information that you can, such as real estate documents, tax returns, retirement, and other investment account statements.
- List all outstanding debt.
- Ask your divorce lawyer first, but you may need new checking and savings accounts or remove your future ex-partner from existing bank accounts.
- Update insurance plans and change beneficiaries.
- Make a list of any irreplaceable items that you would like to retain, such as picture albums, heirlooms, or antiques.
- Create or update your medical power of attorney, will, and other such documents, which is critically important if you have kids.
Create an Emergency Fund
Divorce can certainly be classified as an emergency. An effective way to protect yourself and your money during this period are by creating an emergency fund.
This starts with baby steps, and step 1 is saving $1,000 for your emergency fund. Now it’s much easier to do this during high growth economic times or in a low tax environment but this is something that you want to do no matter what. Arrange to do that as soon as you can. During a divorce, unexpected things almost always happened. The knowledge that you do not have to use your credit card to take care of it brings a huge sense of relief.
Baby step 2 is to pay off all debt, except your residential property. This can be much easier if you make some lifestyle adjustments, such as reducing the number of times you go out to eat, for example.
Divorce can be expensive, and you need all the supplementary income you can get. Stockpile cash as much as you can while you keep making monthly payments on your outstanding debt.
Make Adjustments to Your Budget
During a divorce, aspects such as selling your home and belongings, spousal support, attorney fees, and child support are just some areas to consider. The smart thing to do in this situation is to create a new budget, bearing in mind that it will likely change month over month until the divorce is finalized.
Make sure that you create your budget before the month begins and control every dollar. This is called zero-based budgeting, meanings that your income less expense should be zero. Remember, you must focus on saving cash right now, so this is obviously not the time to go see any shows or sporting events. Thus, cut back or save more wherever you can to achieve this goal.
Considering Divorce in Kentucky? Speak with an Experienced Family Law Attorney
If you are facing a divorce, it is sure to have financial implications. Some financial aspects of a divorce could even negatively impact your credit score. To make sure you are fully prepared for this process, it is best to work with a skilled divorce lawyer.
At the law offices of John H. Ruby & Associates, we have several years of experience representing clients for divorces and other family legal matters in Kentucky. Our lawyers have an in-depth understanding of the divorce process, and how it can affect your financial situation. We work closely with our clients to provide strong legal guidance and moral support during this difficult time.
Call our office today at 502-895-2626 to schedule a personalized consultation. You may also message us through our online contact form or stop by our Louisville office in person at your convenience.