Divorce is a messy affair even when things go smoothly. It impacts nearly every area of a person’s life. Did you know it can affect a person’s credit score? If you are recently divorced or heading in that direction, Chicago’s ABM family Law recommends keeping an eye on your credit score.
ABM divorce attorneys explain that there are multiple ways in which divorce can negatively impact your credit score. The only way to know that it is happening is to monitor your score through one of the three major credit reporting agencies. All three offer free online accounts with continual monitoring. Federal law also entitles you to one free credit report per year, per reporting agency.
More About Your Credit Score
Before getting to how divorce can hurt your credit score, it is important to understand what a credit score is. Here is a simple definition: a credit score is a numerical representation of how likely you are to default on a new line of credit.
Applying for new lines of credit leads to the creditor checking your history and credit score. Your history tells the creditor how dependable you are at paying your bills. The score gives a clear indication of your chances of making good on new credit. The higher the score, the more likely you are to pay on time.
How Divorce Impacts Credit Score
Given that your credit score determines whether or not you can get future credit at reasonable rates and terms, you should know how a divorce can impact it. There are three ‘big ones’, so to speak:
1. Late or Missed Payments
You and your spouse likely had joint debt while you were married. Maybe you had a mortgage in both of your names. If your spouse was given the house in the divorce settlement, you might assume they are still paying the mortgage. That affects your credit score for as long as your name remains attached to that mortgage.
All joint debts reflect on both of your scores for as long as they exist. Even if you are paying all your bills on time, your ex-spouse’s inability to pay the bills on time could result in late or missed payments that affect your credit score.
2. Reduced Credit Utilization
Your credit score is calculated using a complex mathematical formula that takes into account all sorts of things, including what is known as ‘credit utilization’. Credit utilization is the amount of outstanding debt you have compared to the amount of credit extended to you. Let’s say you had just a single credit card with a $10,000 limit. If your balance on that card was $5,000, your credit utilization would be 50%.
Divorcing couples often cancel their joint accounts. That is a good thing in the sense that one of the parties will not be negatively impacted by the spending habits of the other. Yet closing accounts does reduce a person’s credit utilization rate. In turn, that negatively impacts credit score.
3. Removal of Authorized Users
Maybe your spouse had a credit card in their name and listed you as an authorized user. As long as that account remained in good standing, it reflected well on your credit score despite you not being the primary account holder. But if you are removed as an authorized user, that reflects poorly on your credit.
Divorce often has a negative impact on a person’s credit score. Fortunately, there are things people can do to bring their scores back up fairly quickly. These include paying bills on time and utilizing new forms of credit responsibly.