How Divorce Affects Credit Report

For many people, divorce is a difficult and painful experience to navigate.

The process of dissolving a once-loving marriage, making new living arrangements and separating joint finances can be complicated. If you’re a parent, dealing with custody issues can be even more of a challenge.

In the midst of the chaos of a divorce, people often tend to overlook their credit. Unfortunately, that’s a big mistake.

When you fail to protect your credit during a divorce, your credit scores might suffer. And, if your divorce does damage your credit, those issues could haunt you for many years to come.

How divorce can hurt credit scores

Let’s start with the good news. Divorce doesn’t automatically trash your credit scores.

In fact, you don’t have to worry about divorce itself hurting your credit at all. Your marital status isn’t reflected on your credit reports and it has zero direct influence over your scores.

Still, it’s no secret that divorce and credit problems commonly go hand in hand. Here are two reasons why your credit scores might drop during a divorce:

1. Creditors don’t honor divorce decrees.

Disentangling joint finances and accounts is a complicated part of divorce. If your divorce is a messy one, separating joint accounts can become an absolute nightmare.

During your divorce, the court will issue a ruling known as the divorce decree. Your divorce decree details the division of your marital assets and debts, including which spouse is responsible for paying each creditor.

If you have a joint car loan, for example, your divorce decree will say who keeps the vehicle and who has to keep up with the payments on the loan.

There’s just one problem. Creditors and debt collectors don’t honor divorce decrees. If a judge orders your ex to pay a joint credit obligation, but he or she fails to do so, 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 upon the lender’s policy).

Divorce doesn’t dissolve the joint accounts you opened with your ex nor does it remove them from your credit reports. Your lender will still expect both of you to pay back the money you borrowed, plus interest, as you initially agreed. The account will also remain on your credit reports, regardless of who is responsible for it in your divorce decree.

Here’s why this can be a problem. If your ex is responsible for making payments on a joint account and pays late, the late payment will show up on your credit reports and could damage your credit. If a jaded ex-spouse decides to make a bunch of charges on a joint credit card account, you’ll still be responsible for paying the debt. In fact, a high credit utilization rate on a joint credit card could hurt the credit scores of both you and your ex, even if all payments are kept 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 upon whether your separation was amicable, this may or may not be a realistic expectation.

Why divorce might be harder on women’s credit

As mentioned earlier, divorce doesn’t have any direct impact upon your credit reports or scores. For that matter, your gender doesn’t have any impact upon your credit either. The Equal Credit Opportunity Act (ECOA) strictly prohibits lenders from using credit scoring systems which discriminate on the basis of age, race, religion, and – you guessed it – gender.

Nonetheless, divorce can indirectly impact your credit due to the financial challenges it may bring up. Women in particular may be disproportionately affected by financial difficulties during a divorce.

One reason why divorce can potentially hit women so hard in the financial department is because women, on average, earn less than men. The Bureau of Labor Statistics reported that the average full-time, weekly wage or salary earned by men was $991 in the fourth quarter of 2018. Women, by comparison, earned an average of $796 during the same time period – nearly $200 per week less than their male counterparts.

U.S. Census Bureau statistics point out that women who divorced in the past year report less household income than recently divorced men.

A survey commissioned by Experian also reveals some eye-opening results when it comes to how divorce impacts the credit of men versus women. According to the survey, 54 percent of divorced women say their credit score declined during their marriage. Some 50 percent of the women surveyed also said their ex ruined their credit.

How to protect your credit during a divorce

Every divorce is different. Detangling your credit obligations from your ex-spouse is complicated, regardless of your gender.

Ultimately, it’s up to you to try to safeguard your credit from damage during a divorce. These four tips might help.

Close joint credit cards and remove your ex as an authorized user from any credit cards which are open in your name only.
Freeze your credit reports with all three credit reporting agencies to prevent a vindictive ex-spouse from opening fraudulent accounts in your name.
Cooperate with your ex to separate joint accounts when you can. For example, if you have a joint mortgage, the spouse keeping the home could be required to refinance the loan into his or her name only. Another option with joint loans (like mortgages and auto loans) is to sell the asset (e.g. the house or the car) and use any 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 banks can offer convenience and tend to have higher interest rates on savings than traditional banks. For example, an online savings account with Capital One offers 10 times the national average for all balances and doesn’t have a minimum balance requirement.

Looking for ways to protect your credit during a divorce? Here are 5 more tips which might help.

Moving forward
Sometimes credit damage during a divorce is unavoidable. If you’ve been a stay-at-home parent, for example, and you suddenly have to find a job, it may take a little time to get on your feet financially. Your creditors, however, won’t wait for their payments.
Late payments, defaulted accounts and collections can all take a toll on your credit. In severe cases, you might even need to file for bankruptcy protection from your creditors during or after a divorce.
If you’ve experienced credit damage because of a divorce, here’s the good news. Your credit can be rebuilt over time. You should do your best to protect your credit during a divorce if you can, but know that you don’t have to be stuck with damaged credit forever if the worst should happen.
Divorce proceedings don't affect your credit report or credit scores directly. Rather, you may see an indirect effect because the divorce process often involves splitting up joint accounts, which can very much affect your credit history and credit scores.

Does a Divorce Lower Your Credit Score?

Your credit report doesn't state whether you are married, single or divorced, so changing your marital status has no impact on your credit. However, how you handle any joint accounts with your former spouse can have an effect on both your credit report and theirs.

Joint Accounts Will Still Appear on Your Credit Report

Accounts are reported for each person associated with it, so if you are listed as a joint owner, cosigner or authorized user, you must deal with that account prior to the divorce. That means closing the account completely or otherwise ensuring your name or your ex-partner's is totally removed from the account. As long as the account remains open with both of your names on it, you are both legally responsible for it, regardless of what other agreements may say.

Does a Divorce Decree Void a Contract With a Lender?

Your divorce decree has limited power when it comes to your agreements with lenders and creditors. A divorce decree may specify who is responsible for accounts opened during the marriage, but it doesn't break contracts with lenders. A divorce decree is only an agreement between the divorcing couple and the court specifying who will pay each debt.

If the spouse responsible under the divorce decree is unable or unwilling to pay and the contract has not been changed by the lender, the late payments still will appear on both credit reports and will have a negative impact on credit scores for both individuals.

The missed payments can occur years after the divorce and still will be reported for both people associated with the account. That certainly can be an unpleasant surprise if you haven't dealt with the account appropriately.

In some cases, vindictive behavior during the divorce by one spouse or the other can have a very direct, very negative impact.

Sadly, an angry spouse may try to hurt their soon-to-be former wife or husband by making large credit purchases on joint accounts with the intent of punishing the other person with huge debts or wrecking their credit history.

What they usually do not understand is that by doing so, they also likely will drag down their own credit history at the same time.

How Do I Protect My Credit During a Divorce?

Going through a divorce means you are beginning a new chapter on your own, so having a strong credit history is as important as ever. Here are some ways to help protect your credit during a divorce:

If at all possible, maintain a civil relationship during the divorce process to avoid the pitfalls of a vindictive split. Working together to pay off and close existing joint accounts is the best possible approach.
If paying off and closing an account is not possible, try to convert the account to an individual account. Contact each creditor and explore the options available with that lender.
Even if you think an account is in your name only, double check with the lender to make sure your spouse is not listed as an authorized user. If they are, make sure to have their name removed.
The most important thing is to make sure that payments are made on time for any joint account as long as your name is on it. Doing so will help you make a clean separation without financial burdens that could haunt you even after the divorce is final.

Checking Your Credit Reports Often Is Key

You are smart to want to protect your credit, especially when going through major life changes. One key to protecting your credit is to monitor your credit reports frequently. You are entitled to a free report from each of the three credit reporting companies once every 12 months through AnnualCreditReport.com. Doing so will help you keep your credit in good shape and ensure that there are no surprises as you enter a new stage in your life.