Ending a marriage has a massive impact on almost every aspect of your life. In one fell swoop, marital status, living situation, the time you spend with your kids, and more change drastically. One area where it often has a devastating effect is when it comes to money. The questions of how to rebuild your finances and credit after divorce often arise.
Does Divorce Hurt My Credit?
The quick answer to this question is that divorce can damage your credit. Especially if you don’t keep an eye on it and let your finances get out of hand.
During the process, you and your ex split up all of your shared assets. Even though the goal is for each party to maintain a lifestyle similar to that enjoyed during the marriage, finances often take a hit.
You may wind up on the hook for a mortgage or car payment. Child and spousal support often factor into the equation. Or it may be as simple as struggling to pay all the bills from a single paycheck for the first time.
Luckily there are some things you can do now, and ways to help rebuild finances and protect your credit after finalizing your divorce.
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Inventory Your Finances
The best place to begin is to take stock of what you have. Catalog your income, all of your expenses, assets, and debts. You can use a spreadsheet, a notebook, post-it notes, or whatever tool you’re most comfortable with.
List all open accounts, assess any investments, and collect what remains of your economic life after divorce. This provides a comprehensive picture of your finances.
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Protect Your Credit Score
Your credit score influences everything from applying for home and car loans to renting a new house to career opportunities. It can also take a hit when a marriage ends, so it’s important to keep an eye on it and rehab it when necessary.
As you separate, you and you and your spouse will likely have an overlap period where you both have access to shared money. Make sure to keep a careful eye on any joint accounts or debts.
A recent article from financial experts compiled four helpful steps to protect your credit during a divorce. These measures help guard against sudden drops in your score, your ex racking up secret debt, or surprise unpaid bills on shared accounts.
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Examine Your Credit Report
Become familiar with your credit. You already should be, but if not, get to it.
This means knowing exactly what accounts link to your credit score. It’s important to know what connects to your spouse and what you have on your own.
Throughout years of marriage, it’s easy to forget about accounts, or not realize how they affect your standing.
The easiest way to correct this is to pull credit reports from the three credit bureaus, Experian, Equifax, and TransUnion. This helps you differentiate between personal and joint accounts.
Note all authorized users on joint accounts. Authorized users can be removed to cut off their access. Taking someone off an account is often fairly easy. This also means your ex’s spending no longer reflects on your credit score.
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Split Joint Accounts ASAP
If you can, work to separate joint accounts early on in the process.
Things often get tense as divorces continue. It may be easier to agree to close accounts, split earned rewards, and the like before things become testy.
If spouses hold joint accounts on credit cards, any missed, late, or non-payments adversely affect both parties’ credit.
Closing out all shared accounts rather than splitting who is responsible for each is usually the best idea according to experts. Even if you decide your ex pays a certain card, missed payments still impact you if you remain on the account.
Be aware that closing accounts does cause a dip in your credit score.
However, this is usually only temporary and should bounce back once you open and use new accounts. It’s also key to be consistent and on time with payments. This helps ensure your credit score remains as strong as possible.
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Contact Your Creditors
Another step: contact your creditors to let them know of your change in marital status.
Before closing joint accounts, credit card companies require you to pay off any remaining balance. If you owe nothing, you and your ex can simply shut it down.
If you still owe, you may have to discuss payment plans, refinancing a debt into one person’s name, or transferring the balance to an individual account. You and your ex may be able to agree to sell off an asset to pay what you owe.
Whatever system you work out, it’s always best to get the terms in writing. Always.
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Freeze Your Credit
Freezing your credit is an extreme step, but one that might be necessary to protect your credit score. Especially if you have concerns about your spouse opening new accounts in your name without your consent.
Freezing credit simply means no one can open new lines of credit in your name, not even you. It’s free and all you need to do is contact the three credit bureaus. You can freeze your credit for a specific amount of time or indefinitely while you get your situation in hand.
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Create A Balanced Budget
Once you have a handle on your assets and obligations, the next step to rebuilding finances and credit after divorce is to balance your budget. Monthly expenses change after a marriage ends. Knowing what comes in and what goes out is key.
It’s important to track your expenses and be aware of how much you spend, and where.
You can use a simple Excel spreadsheet, but there are many online tools and apps available as well. And more pop up every day. It’s all about finding one that works for you and, most importantly, that you will use.
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Financial Safety Net
Having a financial safety net is hugely important now that you’re single. Many experts suggest having a cushion of at least three to six months’ worth of living expenses set aside just in case. This provides a buffer in case of an emergency.
That’s great if you can pull it off, but it’s also a substantial chunk of change and many simply can’t pull it off.
Still, set aside what you can in case of the unexpected. Many banks and credit unions offer free initial consultations with financial planners. This may be an option worth exploring to assess your current finances and establish goals to rebuild your finances and credit after a divorce.
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Prioritize Expenses
Similar to budgeting, you should also establish or reestablish financial priorities after a divorce.
- What are your most important expenses?
- Where can you trim the fat?
- Do you need to build up your retirement or invest in your children’s college fund?
These are a couple of common questions to ask yourself, but there are many others.
Figuring out what’s most pressing and important helps provide an economic roadmap and show you where you need to focus, and where you don’t.
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Examine Your Taxes and New Filing Status
People often fail to account for taxes and their impact in the wake of divorce.
Some assets received in the division of property are subject to taxes and fees. But the biggest way divorce impacts your tax future is in your filing status. You’re no longer married, after all, so you don’t get to file as such.
Moving forward, you may want to change your withholdings or even alter your investment strategy depending on the impact. Knowing how your taxes change is also a key step to helping rebuild finances after divorce.
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Make A Clean Break
Once you finalize the divorce, it’s important to make a clean break moving forward.
As we said, deal with any joint accounts. If your spouse runs up debts on a shared credit card, that may hurt your credit. Creditors may even come after you for payment.
In the division of property, it’s common for one spouse to get things like a car or home. But what many people fail to realize is that divorce doesn’t automatically alter any financial agreements you entered into while married.
Make sure to remove your name from any applicable loans, mortgages, titles, or deeds. If your ex misses payments and your name is still on the paperwork, it can come back to haunt you.
No one wants to start in a hole trying to rebuild finances after divorce, so do what you can to protect yourself now.
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Have A Plan To Rebuild Finances After Divorce
Making a plan goes a long way towards helping rebuild finances after divorce. Take any of these strategies, among many others, and draw a roadmap of where you want to go and how to get there.
Some people accomplish this on their own, while others enlist the services of financial professionals. It often looks like a daunting or overwhelming task, but it helps to have a concrete plan to look at.
Many steps go into trying to rebuild finances and credit after divorce. These are just a few. What you can accomplish depends on your resources, abilities, and circumstances. But you don’t have to be in a monetary hole forever.
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