How to Build Your Credit After Divorce
A little planning can make the process go much more smoothly.
Divorce is stressful for everyone, but it's especially so if you've never established an independent credit history. Splitting up can make it difficult for you to get loans or lines of credit on your own. And if you don't close joint accounts, your ex-spouse's actions can affect your credit long after the divorce papers are signed.
If you want your new life to start off on the right foot, you have to make a plan, both independently and with your ex. Here's some advice on how to do that.
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Take inventory of your finances
Divorce often means a rebalancing of the budget. While some expenses may go away, others become your sole responsibility, and if you aren't getting alimony, you'll no longer have the benefit of your ex's income to ease some of the burden. This can cause you to fall behind on your payments, which can hurt your credit.
Avoiding this outcome simply takes some preparations. Make a list of all of your expenses, including any car or house payments that you'll be solely responsible for following the divorce. Next, measure those expenses against your income -- don't forget alimony and child support -- and make whatever adjustments necessary to balance the two. This may mean curbing spending or boosting your income in order to make ends meet.
It's also a good idea to pull your credit reports to see whether there are any red flags that might give creditors pause, like numerous hard inquiries or a high credit utilization ratio. Each of the three credit bureaus has its own report, and they're legally required to give you one free copy per year through AnnualCreditReport.com.
These reports are essentially a grade of your financial responsibility, and creditors use them to assess the risk of giving you (or not giving you) a loan. You won't be able to change anything in the reports immediately -- unless there's an error, which the credit bureau should be able to resolve quickly -- but being aware of what they say can give you some idea of what to expect as you try to establish new credit on your own.
Close joint accounts
Divorce doesn't relieve you of any joint debts you and your ex incurred during the marriage. It doesn't matter what kind of verbal agreements you've made about who will pay for what. If your spouse falls behind on the payments, both of your credit scores will take a hit, and the creditor can come after you for the remaining balance.
That's why it's important to close all joint accounts as soon as possible. If you don't want to get stuck paying for your ex's new car, then talk to them about getting the loan refinanced under their own name. If they have credit card debt, they should see if they can transfer the balance to a new card so that you can close the joint card that the two of you shared.
Until all of your joint accounts have been closed, it's crucial that you continue to make at least the minimum payment on all of those bills each month. If your ex agrees to make the payments, follow up to ensure that they did. A single late payment can drop your credit score by anywhere from 60 to 80 points, according to FICO data, assuming an initial credit score of 680. And if your credit score is 780, one late payment could knock as many as 110 points off your score. Though the effect on your credit will diminish over time as your more recent payment history takes precedence, that late payment can stay on your credit report for up to seven years.
Establish credit independently
If you already had an established credit history before you got married, or if you were a joint account holder on your spouse's accounts, you probably won't have any trouble obtaining credit in your own name, provided your previous credit history was good. But if this isn't the case, you may have a few rough months until you can establish yourself as a responsible payer in the eyes of creditors.
One of the best ways to build your credit is to open a credit card and use it responsibly. If you're unable to qualify for one on your own, see if you can get a family member or friend cosign for you. Just make sure you can actually keep up on the payments, or else you'll be hurting their credit in addition to your own.
Another option is to sign up for a secured credit card. These generally have low credit limits and require a security deposit, but your payment activity is reported to the credit bureaus every month, so consistently paying on time will raise your credit score as if you were using an ordinary card.
If you're thinking about changing your name, then it's a good idea to do this before you open any new credit accounts so that they will be listed in your new legal name. You should also contact the institutions where you have existing financial accounts and notify them of the name change so they can update their records.
Going through a divorce isn't easy, but by taking these few steps, you can ensure you won't run into any unexpected financial surprises when you apply for new credit on your own.
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