By Laurie Itkin
When you are going through a divorce, financial worries are front and center. You may wonder how retirement accounts or pensions will be divided or how monthly child support payments will be calculated. One important issue that often gets overlooked is credit and ways to mitigate the potential negative impact of divorce on your credit score.
Divorce’s Impact on Your Credit Score
Your divorce decree may specify who is responsible for accounts opened during the marriage, but it doesn’t impact the contract with lenders. If payments aren’t made on accounts you hold jointly with your ex or soon-to-be ex, your credit score could tank. Even if your divorce decree declares that your ex-spouse is responsible for the joint debt, if he fails to make a payment, the creditor may add the late payment to both of your credit reports.
Do not blindly trust your ex-spouse to make payments on accounts that have your name on them. That includes mortgages, credit cards, and car loans. If he is responsible for paying accounts in your name, keep track of the due dates and check for payment as the due date approaches. Although it might not seem fair, in order to protect your credit, you may have to be the one to make the minimum payment.
Why Having Bad Credit Makes Life More Expensive
You probably know that if your credit score is low, you may be denied credit or charged a very high interest rate. This is because a low credit score tells lenders that you are high-risk and may default on your obligation. In order to compensate for that risk, they demand higher interest payments from you to make it worth their while to lend you money.
You may find it difficult to get approved for a rental apartment if you have bad credit. Landlords often check potential tenants’ credit scores to help them assess whether they are likely to pay their rent on time.
Whether you are paying off a car over five years or a mortgage over 30 years, the total amount paid in interest between someone with good credit and someone with bad credit can be staggering. For example, if you wanted to borrow $20,000 to buy a used car and were offered a 60-month loan at an annual interest rate of three percent, your monthly payments would be $359 and the total interest paid over the life of the loan would be $1,562. However, if you had a low credit score and had to pay an annual rate of six percent to borrow the same amount of money, your monthly payment would be $387 and total interest paid would be $3,199. The cost to you is an additional $1,637. Having bad credit is expensive!
$20,000 Used Car Load for 60 Months
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How to Maintain Good Credit after Divorc
Payment history and level of debt are two of the biggest factors affecting your credit score. By downsizing your life to fit one income and not relying on child support or alimony payments for 100% of your income, you can maintain your credit score during and after divorce.
The last thing you want to do after a divorce is take on more debt. When you’ve been used to living on two incomes, downsizing your life to fit one income can be tough. It often requires some major choices and life changes. That may mean selling your house and buying a less expensive one or renting an apartment. If you can no longer afford your auto loan payments, you might sell the vehicle and buy a less expensive one. You may have to spend less on entertaining or eating out.
It is dangerous to rely completely on child support or alimony for income. If your ex loses his job, he may have a legitimate reason to ask the court to temporarily lower or even eliminate support payments. It might be difficult to live as though you’re not depending on those court-ordered payments, but if the payments ever stop, you’re prepared.
How to Repair Your Credit
What happens if your credit is damaged due to divorce? One option is to hire a credit repair service. You might find it difficult to discern which service providers are legitimate and have a strong history of delivering results for clients, but that is important to find out. If monthly fees for credit repair service are not something you can currently afford, here are some steps you can take on your own to start improving your credit score.
About the Author
Laurie Itkin is a financial advisor, certified divorce financial analyst (CDFA), and the author of the Amazon bestseller, Every Woman Should Know Her Options. For less than the cost of a one-hour meeting with an attorney, her online course, Woman’s Guide to Financial Independence After Divorce, teaches separated and divorced women essential financial concepts. You can request a free consultation or subscribe to Laurie’s newsletter by visiting TheOptionsLady.com.