Creating a positive start after a divorce requires protecting your credit score, finances, and bank account. Very few aspects of your life will remain the same following a divorce. Even if the divorce was the right decision, it will still be a stressful time as you adjust to your new normal. One major aspect of your life that changes during a divorce is your financial situation.
Your credit score is a vital part of today’s financial climate. It can affect many aspects of your life, including your ability to find housing or secure financing for a home or car. It is possible you have not considered your credit score in years, especially if your spouse is the higher earner in your relationship. However, your credit score will need to stand on its own after your divorce.
How Divorce Affects Credit Score
Credit scores were created to be a predictor of your credit behavior based on information pulled from your credit reports. They range from 300 to 850, with higher scores reflecting positive credit behavior. A score above 700 is generally considered good, and a score above 800 is typically considered excellent. Scores below 700 can allow you to qualify for loans and credit cards, but you can usually expect to pay higher interest rates or be asked to meet other requirements to be approved.
The act of getting a divorce does not directly alter your credit score. However, there are many factors related to a divorce that can ultimately hurt your credit. This changing financial climate will take time to adjust to, which could cause financial trouble that may reflect on your credit score.
Factors that can indirectly affect your credit after a divorce include the following.
Changing Income
After a divorce, your income is likely to change dramatically. Not only will you be transitioning from a two-income home to a single-income home, but you may have new expenses that were not applicable before your divorce. This can include child support, alimony, rent, car payments, and more.
These payments can quickly add up, draining your income faster than expected each month. Failing to make any of these payments on time and in full is likely to affect your credit. The credit bureaus will not provide an acclimatization or grace period following your divorce.
Closing Joint Credit Cards
You may share a credit card with your spouse that you want to close or be removed from as an authorized user. There are several implications of closing a credit card or losing the benefits of being an authorized user, however. First, your credit utilization ratio may increase if you close a card but still have balances on others. These outstanding balances will cause your available credit percentage to be lower and your credit utilization ratio to be higher.
Your credit utilization ratio is the percentage of your available credit that you are currently using compared to your total available credit. A ratio below 30% is generally considered ideal when trying to maintain a good credit score. Further, if your spouse has a better credit score and consistently makes on-time payments, your credit score may drop if you close an account they are tied to.
Missing Payments on Joint Debt
Joint accounts are part of both spouses’ credit reports. If one spouse defaults on a debt, the other spouse’s credit is likely to be affected. This includes all debt, such as mortgages, installment loans, and credit cards. The joint accounts will stay on your credit, even if the divorce decree states the other spouse is responsible for making the payments. This also applies to joint debt that one spouse added without the permission of the other spouse. If you or your spouse do not make the payment, the consequences will appear on both of your reports because creditors do not often acknowledge divorce decrees.
Protecting Your Credit Score After an AZ Divorce
Divorce is a major life stressor, but creating a plan for how you will successfully build your life after can ease some of the stress you are feeling. The following are tips to consider that can help protect your credit score as you navigate your divorce:
Pull Your Credit Report
Your credit report will show personal financial information, including bill payment history, current debt, loans, requests for new lines of credit, bankruptcy history, and lawsuit records. It will reveal all accounts and debts currently in your name, preventing anything from slipping through the cracks, especially if you are unaware of any of the accounts or debts. Credit bureaus can sell the information compiled on your report to potential employers, lenders, rental property owners, and insurance companies to determine if you meet their qualifications. Though credit reports contain important information, they will generally not include your credit score.
Even before you officially file for divorce, it is important to understand the complete picture of your credit history. There are three credit reporting agencies (CRAs): Equifax, TransUnion, and Experian. Each will calculate your credit score a bit differently. According to federal law, you can receive one report free of charge from each of these three reporting agencies every year.
The website AnnualCreditReport.com is the only federally authorized website to issue free credit reports from the three CRAs. There are many websites that claim to offer free credit reports, but they are hidden behind the purchase of other products or bill you for services that you then need to cancel, so use caution when choosing where to get your credit report. Due to the financial hardships that resulted from the COVID-19 pandemic, you are authorized to receive a free credit report from AnnualCreditReport.com each week through December 2023.
Close Joint Accounts
Joint accounts are held by both spouses, and both spouses remain obligated to pay the balance to the creditor even after a divorce.
For example, imagine that a couple purchases a car that is primarily for one party’s use but puts both of their names on the loan. This makes the car and debt community property. In the divorce, the vehicle is awarded to the spouse that uses the vehicle, and they are instructed to make the payments on that vehicle; however, they stop making the payments, and the loan defaults.
The creditor can repossess the vehicle, then initiate collections against both ex-spouses for the remaining balance and associated costs because they are both named on the loan. If the party that was not in possession of the vehicle settles the lawsuit by paying the costs, they can then seek reimbursement from their ex-spouse. However, this will not remove the negative strike on their credit report. Though creditors can voluntarily release a party from a joint debt, it is not a common practice.
Ultimately, joint accounts pose a significant risk to your finances and credit score because you cannot control the payments. If your ex-spouse stops making the payments or increases the debt, you are likely to be held just as responsible for the consequences. Closing all joint accounts is one way to protect yourself from financial decisions that are not your own. If the account cannot be closed, work with your spouse to fairly split any community debt. It may also be possible to request a refinance of the debt that your spouse is responsible for in your divorce decree, forcing them to create a new loan that is not attached to your name.
Remove Authorized Users
Many credit cards will not create a joint account; instead, they will have a primary account holder that designates authorized users for the card. As a community property state, Arizona considers all debt accrued during the marriage to be considered marital property that the spouses are equally responsible for paying. Once the divorce has been filed, Arizona considers each party responsible for their own debts unless the debt is determined to be marital in nature.
This divorce determination of liability, however, is different from how the credit card company determines liability for debts. A credit card will hold the primary account holder responsible for all debt on the card, including any debt created by an authorized user. If you leave your spouse on your account as an authorized user, they can use the card without any obligation to pay the debts they accrue. You can potentially sue them for the balance they created, but it will not release you from paying the debt.
If you are an authorized user of your spouse’s credit card, it is also wise to remove yourself. Though you are not responsible for the debt on the card, your credit can be affected if they then make late payments. There is an appeal process that can have the late payments removed from your credit report, but it may take up to 30 days. A month is a long time when you are trying to establish your own home and life separate from your spouse.
Make On-Time Payments
During your divorce, it is important to continue making on-time and full payments to your debts. Though the legal process may be overwhelming, setting automatic payments or reminders can help you avoid any consequences from late payments. Even a single late payment can dramatically affect your credit score, and you may be charged additional fees for paying the debt after the due date, further damaging your financial stability. Spending within your means and avoiding taking on debts after your divorce can also help you make on-time payments.
The consequences of late payments can be long-standing, as late payments will remain on your credit score for up to seven years. It can be difficult to build positive credit once there are blemishes on your report, so avoiding late payments should be a top priority. Creditors will give a buffer of 30 days, but generally, no more than 60 days, before they report the late payment to the credit bureaus, so it is possible that you can make the payment before it has the chance to affect your credit score.
Consult with a Professional
With all the financial changes that will happen during a divorce, it would be wise to consider speaking with a financial advisor or credit counselor. They can help alleviate the emotional burden you are likely experiencing as you face separating assets and debts from your spouse by creating a realistic budget that provides valuable insight into what your post-divorce finances will look like.
They can also provide personalized advice on managing your debt and protecting your credit score during and after your divorce. You will have a full plate as you navigate the divorce process, so learning to handle finances on your own is not a task you should take on. Experienced professionals will have years of knowledge and expertise, imparting valuable wisdom and advice during your conversations.
A financial advisor is not the only professional you should consult with during your divorce: it is also wise to speak with a divorce attorney. They will be able to provide insight into legally safeguarding your assets, like bank accounts and investments. Simply taking the asset can cause issues during your divorce, but an attorney may be able to suggest legal actions like freezing the accounts or requiring both signatures to make withdrawals.
Protect Your Credit in an Arizona Divorce
Even in situations where a divorce is the best choice for you moving forward, there is no limit to the number of potential complications that you can encounter. One complication that you can plan and accommodate for is your changing finances. Building a fresh start will be aided by maintaining a good credit score, a process that starts with avoiding any derogatory marks as you handle your divorce.
The consequences of even short-term financial difficulties can linger for many years after your divorce, so getting ahead of any potential issues is the best way to begin your new life. Contact top Arizona divorce lawyers for more information on protecting your financial situation as you work through your divorce. Our skilled team is ready to help you close out the chapter of your marriage and move on to your next adventure.
Jonathan Roeder, Founder/Director of Marketing of The Valley Law Group, is an Arizona native who has dedicated his life and career to the service of others. After graduating salutatorian of his high school class, Jonathan attended beautiful and prestigious Pepperdine University, where he majored in Political Science. During his tenure at Pepperdine University, his passion for helping others grew after securing a clinical position with a residential treatment center for juveniles with substance addictions. Post-graduation, Jonathan returned to Arizona and served as a residential manager for mentally and physically disabled homes.