Divorce can significantly impact your life in many ways. One often overlooked area that divorce can affect is your credit score. Credit bureaus do not report marital status and divorce itself doesn’t necessarily mean your score will drop. Usually, your credit score is affected indirectly due to divorce. To keep your score from taking a dive, it’s essential to consult with your Certified Divorce Financial Analyst to help you navigate your finances before, during, and after your divorce is final.
Maintaining a good credit score isn’t just important when looking to borrow money. Landlords, utility companies, and current or future employers can use your FICO (Fair Isaac Corporation) credit score to determine if they want to do business with you. The amount of debt you carry will identify to lenders whether or not you are a low or high-risk borrower and change your score. Your FICO score changes due to several factors, including credit inquiries, payment history, age of credit, credit utilization, and the total number of accounts. Consider the following tips to help you build and/or maintain your credit score.
There are two types of credit inquiries: soft inquiries and hard inquiries. Soft inquiries won’t show up on your credit report. These include situations where you check your own credit score with a free service, or when a credit card company pre-approves you for an offer. Because soft inquiries do not show up on your credit report, they have no impact on your score.
The second type of inquiry is a hard inquiry, and these do show up on your credit report. These inquiries are triggered when you apply for credit like a mortgage, credit card, car, or another type of loan. According to FICO, a hard inquiry can drop your score an average of 5-10 points, so it is important to only apply for credit if it is absolutely essential.
Timely payments have the greatest effect on your credit score, 35%, to be exact! Missing payments regularly can severely negatively impact your credit score, so it is important to continue to make on-time payments throughout the divorce process regardless of who will be determined responsible for the debt.
The age of credit accounts for 15% of your total credit score and is concluded by two factors; the age of your oldest account and the average age of all your accounts. The longer you’ve had the accounts, the better! Be sure to keep open all accounts that are solely in your name. Joint accounts may remain on your credit report even if your ex is considered responsible for payment. However, it may be in the best interest of both parties to hold off on closing any joint accounts until speaking with a financial advisor specializing in divorce to help mediate the process.
Your credit utilization ratio is determined by comparing your credit limit to how much credit you are using. For example, a person with no mortgage or loans who has a credit card with a limit of $5,000, and the balance on that card is $1,000, then the credit utilization of this person would be 20%. Credit utilization, or usage, accounts for 30% of your credit score. It is best to keep that ratio at 30% or less, although getting that number closer to 10% is ideal.
This category doesn’t just take into consideration how many credit cards you carry. You need to have a mix of revolving debt (credit cards) and installment debt (car loans, mortgages, other loans). This category is 10% of the total score, so while it isn’t a major factor, it is important to have a variety of debt. The more variety of debt you carry, the more a lender considers you trustworthy.
When evaluating your financial situation during a divorce, it is important to cancel any unused memberships or subscription services that may go unnoticed and unpaid to avoid any collection agencies reporting to credit bureaus. Bills that go into collections can have a severe negative impact on your credit score. Unpaid parking tickets, utility bills, medical bills, and delinquent child support payments can all be reported to credit bureaus, though it may take 90-180 days for these types of bills to be sent to collections.
Adjusting your lifestyle to fit your new income is a good first step to ensure you will be able to take care of debt you are responsible for in the divorce decree. Monitoring your credit with free services is another way to keep yourself on top of your financial situation. Remember, these services do a soft pull on your credit, so your score will not be affected. Divorce changes everyone’s financial situations, so it’s best to get ahead of the game when protecting your credit score and financial security.