Rebuilding Credit After Divorce

Divorce itself won’t ruin your credit, because marital status doesn’t show up on your credit report.

But the divorce process sure does a number on your finances, which in turn impacts your ability to pay the bills.

A strong credit score is essential. Without good credit, you could pay tens of thousands of dollars in extra interest for mortgages and other loans. Your credit score could even make a difference when you apply for an apartment, a cell phone contract or a job.

Even if your credit does take a hit due to divorce, you can take steps to fix it. Here’s how.

When divorce hurts credit

Your credit score could suffer if:

Your ex is vengeful

If your spouse stops paying a joint loan or credit card, your credit score will drop – even if you’re divorced.

“In the bank’s eyes, you still have a joint account…The bank wasn’t part of your divorce settlement,” says Valerie Rind, author of “Gold Diggers and Deadbeat Dads: True Stories of Friends, Family and Financial Ruin.”

Your balances go up

Ideally you’d use no more than 10% of available credit at any given time; anything over 30% could hurt your score. But divorce-related costs make it hard not to use a card.

You miss a payment

Those costs mess with cash flow, especially since you’ve now got just one income to cover the bills. On-time payment makes up 35% of your FICO score. Late payments can really hurt your credit score. A payment that’s more than 30 days late could make your score drop as much as 100 points.

Separating your credit

If your spouse is an authorized user on your card, remove them. This prevents any revenge shopping or other overuse. As the primary cardholder, you’re the one responsible for the bill.

Joint credit cards are rarely issued these days. But if you got a joint card some years back, then you’re jointly responsible for the debt. That’s why it’s crucial to separate your credit.

The card issuer might agree to take you off the account, if there’s no balance and your spouse wants to keep the card. Or the two of you might agree to close it.

However, closing the card could ding your credit score in two ways:

1 - Credit utilization ratio

Suppose you have one joint card and one in your name only, each with a $10,000 credit limit, and that in a typical month you charge $2,000 for childcare and utilities. That’s 10% of your total available credit. Once you cancel the joint card, you’ll be spending 20%.

2 - Length of credit history

The number of years you’ve had your accounts are averaged to create a “credit age,” which makes up 15% of your FICO score. Cancel a card and that credit age goes down.

Rebuilding credit (or starting from scratch)

If you’ve never had a loan or a credit card, or been an authorized credit user, you probably have what credit bureaus call a “thin file.” To fatten it up, try these tactics:

Check your credit report every four months, since any mistakes could hurt your score. Each year you’re entitled to one free copy from each of the three bureaus, via AnnualCreditReport.com.

Get a credit card. A secured credit card (one that’s backed by a cash deposit) might be all you can get at first. Use it carefully and pay in full each month. Don’t apply for multiple cards; each requires a “hard inquiry” on your credit report, which can hurt your score. Over time with responsible use, you may be able to “graduate” to an unsecured credit card.

Ask to become an authorized user on someone else’s card.

Open a credit-builder loan, which is an installment loan held in a bank account. Self’s Credit Builder Account is one example.

To learn other ways to establish a good credit history, see “How to Build (or Rebuild) Credit”.

The best time to establish credit is as soon as you turn 18. The second-best time is today.

Protecting your credit

As you build credit, take steps to keep it safe. For starters, consider a credit freeze. After all, your ex may have your Social Security number, birth date and other info that could be used to open new cards or loans in your name.

As noted earlier, on-time payments are essential to a healthy credit score. One way to be sure is to automate a monthly minimum payment. “That way you’re never late,” says Melissa J. Ellis, a certified divorce financial analyst and certified financial planner with Sapphire Wealth Planning in Overland Park, Kansas.

Stressed out paying off debts from different sources? It’s possible to restructure what you owe with a debt consolidation loan. The result could be “a manageable single payment, so that you’re not drowning in multiple payments,” Ellis says.

Suppose the divorce left you strapped and you’re not sure you can make monthly minimum payments. Something called the “hardship plan” might help save your credit. When full-time parent Amy Beardsley faced divorce and several thousand dollars of consumer debt, she got her two credit card issuers to agree to a lower interest rate and lower minimum payments.

“As long as I made the monthly payment, they didn’t report it to the credit bureaus,” says Beardsley.

Most card issuers have hardship plans, although “they don’t like to advertise it,” says Beverly Harzog, credit card expert and consumer finance analyst for US News & World Report. If a customer service rep says no such program exists, Harzog recommends asking for a supervisor.

The key is to call before you’re actually in trouble.

“Let them know what’s happening in your life,” Harzog says. “Emphasize that you care about paying bills and you care about your credit.”

Should you file for bankruptcy?

Sometimes bankruptcy is the only option for debt that truly cannot be repaid. Generally speaking, though, it should be a last resort. A financial advisor or qualified credit counselor might help find ways around this, such as debt consolidation or debt settlement.

Harzog suggests contacting the National Foundation for Credit Counseling (NFCC), which provides help on a sliding-scale fee. Advisors who work through the NFCC agree never to turn away anyone because of an inability to pay.

Counselors can help with non-bankruptcy issues, too, including money troubles after divorce.

How long will it take to rebuild credit?

Every case is different. Ellis has a client whose credit score began to rebound just six months after her divorce-related bankruptcy.

And if your credit is trashed? Still no easy answer. For example, an unpaid account could stay on your report for seven years, yet within two years have less impact. Short form: Observe the credit-rebuilding practices noted above and your score should steadily improve.

“You’ll get there,” Harzog says. “You really can fix bad credit. It just takes patience.”

About the author

Longtime personal finance writer Donna Freedman lives and writes in Anchorage, Alaska. See Donna's profile on LinkedIn.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren's profile on Linkedin.