Divorce is a painful experience for either party and mostly affects everything in-between, including the children. Navigating these tough times will take an emotional, physical, and financial toll on you.
For starters, you have to make new arrangements after dissolving a once-fruitful love. This includes separating joint accounts and battling it out in court for child custody, if needed.
During this process, many people forget about their credit. A terrible mistake. This will only manifest itself in the future and may stick around for the rest of your life. Failing to protect your credit will result in a damaged credit score and if you’re a woman, the likelihood of increased suffering is high.
1. Creditors Fail to Honor Divorce Decrees
Divorcing is not all about living apart. You have to go through other processes including separating joint accounts and dealing with finances. This can be a real nightmare if you’re going through a difficult divorce if the other party decides to take you around in circles, or even in a non-contested one.
A divorce decree is what the court will issue when ruling on your divorce case. The divorce decree will contain a myriad of details such as how to divide the marital debts and assets. Keep in mind, the debts will include what your spouse owes to every creditor.
For example, if you have a joint mortgage, the divorce decree will issue a directive indicating who will keep the house and who will continue keeping up with the mortgage payments. See how it can get frustrating and unfair?
That’s not all. Debt collectors and creditors are known for not honoring divorce decrees. How will you suffer, you ask? For instance, if the judge issues an order compelling your ex to continue making payments on a joint loan and he declines, your credit will take a hit.
2. Your Credit Reports Still Indicate Joint Accounts
Entering joint credit obligations with your spouse means both of your accounts will be added to the three leading reporting agencies. However, this will depend on the lender’s policy. Nevertheless, it’s important to note that a divorce will not, in any way, dissolve any joint accounts opened with your ex. In addition, it won’t remove the accounts from your credit reports. In fact, the lender expects you to pay off the existing just right loans including the agreed interest. As such, your credit reports will still have the account listed as an entry, regardless of whose responsibility it is according to the divorce decree. This can cause problems moving forward.
If your ex-spouse is the one making all payments on the joint account and makes a late payment or skips it altogether, this behavior will be recorded in your credit report and will damage it. Also, if the ex-spouse decides to pile up multiple charges on a joint credit card account, the resulting debt will fall on you as well.
Keep in mind, your credit utilization ratio is a key determinant when coming up with your credit score. More debt will increase your credit utilization ratio on the card and as a result, both scores (yours and your ex’s) will take a significant hit. Having said that, it’s in both of your best interest to come to an agreement on how you’ll handle joint accounts after the divorce. However, don’t enter the negotiations expecting paradise.
Why Women Have a Rough Time During Divorce
As you’ve seen, divorce has no direct association with your credit scores or reports. Therefore, your gender has nothing to do with your credit, either. In fact, according to the Equal Credit Opportunity Act (ECOA), it’s unlawful for lenders to use credit scoring systems that discriminate borrowers based on religion, race, age, and, of course, gender.
While all this sounds protective, divorce can indeed affect (indirectly) your credit through the challenges that arise from the entire process. Women, in particular, face the greatest financial challenge during this process. One of the key reasons that put women at a great disadvantage is their income. On average, women earn less than their male counterparts. According to the Bureau of Labor Statistics, the average salary, weekly or full-time earnings by men in the 4th quarter of 2018 stood at $991. For women? Well, they earned close to $200 less per week than the men – $796 in the same period.
Additional statistics from the U.S. Census Bureau show that women divorced in the last year made less in household income, as compared to divorced men.
Another survey from Experian reveals just how much of an impact divorce has on women compared to men and it’s shocking. The survey revealed that 54% of divorced women’s credit suffered during their marriage. Another 50% of women in the survey said their ex-spouses are to blame for their credit woes.
Safeguarding Your Credit During a Divorce
The divorce process isn’t one-size-fits-all. Each divorce will come with its own bottlenecks, and separating credit obligations is bound to be complex, independent of gender.
With this in mind, it’s wise for you to find ways of safeguarding your credit during the divorce process. Here are three pointers to help you out:
- Contact the three credit reporting bureaus and freeze your reports. This will deter your spouse from opening any accounts using your name.
- Close all joint credit accounts and eliminate your ex-spouse as an authorized user from all credit cards that are solely in your name.
- Negotiate with your ex on how to separate joint accounts. One smart move is to sell the asset carrying a loan such as a car or a house and use the proceeds from the sale to pay off any joint debts. The remaining amount, if any, can be split equally.
- Open a new bank account. A savings or checking account with an online bank will protect your finances moving forward. These accounts have higher interest rates and are more convenient compared to conventional banks.
Divorces can be unpredictable, which means credit damage may be unavoidable during this period. Some may come as a shock because if you were a home-parent, it means you must find a job fast. If you’re lucky enough, you’ll find one.
However, it will take you some time to find your footing financially, and creditors don’t have that kind of patience. In fact, the situation can push you to file for bankruptcy to keep creditors off your back during and after the divorce.
Your credit may suffer because of a divorce but the good news is you can repair it, although that will take time and lots of discipline. Protecting your credit during the divorce process is the wiser move for a better financial future.