How to Rebuild Your Credit After a Divorce
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UPDATED: Jan 25, 2013
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Despite it being common knowledge how prevalent divorce is nowadays, people still seem to be getting married.
While divorce is probably one of the worst experiences an individual may endure, it is by no means the end of the world.
Marriage is about more than just a name change, rings, and moving in together. It is a merging of debt and finances between the newly married couple.
As you might imagine, when a marriage goes sour—for whatever reason—and divorce proceedings begin, the aspect of finances comes up.
Since each state has different laws, with some states being community property states, many divorcees find themselves surprised to find out that they are liable for the debts of their ex-spouse.
While no two divorces are the same they still have a strong impact on the financial lives of all parties involved.
Here are some ways you can rebuild your credit score after a divorce.
The Settling of Accounts
First, don’t stop making payments on existing joint accounts. As their name implies, a joint account holds both divorcees liable for payments. Missing a payment, or assuming that you no longer have to pay since you are divorced, is a horrible decision that can negatively impact your credit score.
Depending on a former spouse to make payments is also a little presumptive, especially if the marriage did not end on the best of terms. As always, check with your lender and attorneys to see who is responsible for each and every joint account.
Despite the difficulty of the situation and the emotions involved in divorce, you should speak with your former spouse about closing joint accounts or having names removed on certain accounts. For example, if your former wife receives the house and you move out, naturally only her name should be on the account while you should remove your own.
“It is smart to remove your name from any accounts you will no longer be responsible for. However, although that may help moving forward, the history of the account will remain on the credit report,” said Gail Cunningham, Vice President of Membership and Public Relations at National Foundation for Credit Counseling, in an interview with loans.org.
It is best to work with your attorneys during a divorce to decide how to remove names on joint accounts.
Check That Report!
Another way to rebuild your credit score is to reexamine your credit report. Fortunately, this is relatively free since every citizen is allowed one free credit report a year.
“This will reveal all accounts that are open in their name, along with balances owed, etc, thus providing them with an overview of which accounts they have responsibility for and the amount owed,” said Cunningham.
New divorcees should look at their credit report and check for irregularities. Aside from just making regular mistakes, credit reporting agencies could make the error of having your name reappear on marital debt. A quick double check and correction of errors could raise your credit score to where it really should be.
“The credit scoring models don’t take into consideration the reasons behind the activity reflected in the credit report. Remember, it’s not the divorce that lowered the credit score, but how the credit was handled,” said Cunningham.
A Fine Time to Refinance
Let’s take a look at a common situation leading up to refinancing.
You and your spouse both have decent incomes and are paying off your mortgage and cars. Then things take a turn for the worse and you are divorced months later. Let’s say you get the home and one car as part of the divorce settlement. You have now taken on debt for the home and the car, yet you only have a single income to make payments on both. If your former spouse was bringing in about the same amount of money as you were, then you effectively lost half of your usual cash flow. It’s time for a drastic belt tightening and that means refinancing.
If you don’t refinance then you may be paying more than you should be. Most lenders will try to work with you even if you have bad credit after a divorce. Refinancing is always worth a try since it can result in you having a lower interest rate on existing debt. As you know, lower interest rates mean lower monthly payments, which is a big priority for newly single divorcees trying to get their financial lives back on track.
Get Back on the Horse
Credit can only be built by having debt. However, that’s not all it takes. In order to have good credit, or rebuild your credit, you need to show you can consistently pay back loans. For that reason, it’s a good idea to begin using a credit card under your name now that you’re no longer married. You may even need a credit card for various expenses as you resettle and readjust after a divorce, especially if you move.
While it is probably difficult and may not be a priority in the wake of a divorce, getting new loans, be they mortgages, car loans, or signature loans, is a great way to rebuild your credit. This advice only applies if you have the income to pay for this kind of debt, but if you need and qualify for loans—while having the capacity to pay for them—them you will be doubly rewarded with not only more purchasing power, but with a healing credit score. Once this credit score gets back to average or excellent levels, you will be able to qualify for the best interest rates and terms.
When all is said and done, divorce is a difficult experience and the financial aspects of it only pour salt on the wound. Still though, if divorce wrecks your credit just keep your chin up and remember that it’s not the end of the world. There are ways to rebuild your credit. They might not be easy and may take a bit of work, but you will need a good credit score for future purchases. If you are going through a divorce, just take a deep breath and remember the ancient proverb, “It can’t rain every day.”