How to Rebuild Credit After a Divorce
DIY Credit Repair Basics
09/18/2022
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10/06/2022
There is no denying that going through a divorce is a challenging and stressful time.
On top of the emotional cost, there are financial costs that often tag along with divorce. One of the many ways that a divorce can impact your finances is by negatively impacting your credit score.
If you are dealing with divorce, here’s how this life change could impact your credit score. Plus, we’ll show you how to rebuild if your credit score tanks after a divorce.
How Divorce Can Impact Your Credit Score
Divorce is not something that shows up on your credit report. But according to Nolo, the average cost of divorce is $11,300. With that, it’s not hard to see how the financial ripple effects of a divorce could lead to negative impacts on your credit score.
You might even end up taking out new debt to cover your portion of the divorce fees. After all, not all of us happen to have $11,000 lying around.
Your credit will be especially damaged if you didn’t have any credit in your own name while you were married. For example, closing joint credit accounts without any of your own credit accounts could have a negative impact on your credit score. Or, if your relationship is ending with lots of shared debt, you could face a relatively low credit score.
Will Divorce Hurt Your Credit Score?
When a married couple splits up, the combined household income that was once used to cover joint bills is usually split up.
With a single income and changing financial responsibilities, it’s easy for your finances to get out of control. Specifically, it can be difficult to keep up with your debt payments when your financial situation changes as a result of divorce.
In some situations, it’s simply not possible to make all of the payments with your single income. As you adjust your budget to this new reality, it’s possible to miss some payments along the way. If you miss payments, that can have a big impact on your credit score.
With that, your credit score could suffer after a divorce. But that’s not always the case. Ultimately, it depends on the unique details of your divorce and the financial aftermath.
Why Rebuild Your Credit Score After Divorce?
The right credit score could open the door to the financing opportunities you need for major purchases like a car or a new place to call home.
Not only will a good credit score help you land financing, but it could also save you thousands on financing for a big-ticket item.
For example, let’s say you want to take out a 30-year fixed-rate mortgage with a loan amount of $250,000. If you have a lower credit score and a lock in a 6% interest rate, you’ll have a monthly mortgage payment of $1,729 and pays $290,160 in interest over the life of the loan. But if you had a good enough credit score to lock in a 4% interest rate, your monthly payment would be $1,424 and you’d only pay $179,853 in interest over the loan term.
It’s clear that a good credit score is important.
How to Rebuild Your Credit Score After Divorce
A divorce is never a fun situation. Throughout the process, you’ll have plenty of paperwork to wade through.
Although it’s easy to let your credit score slip through the cracks, it’s important to make rebuilding your credit score a priority after divorce. With that, here’s how to rebuild your credit score.
Check Your Credit Score
First things first, it’s time to check your credit score to determine where you stand. You have plenty of options to check your credit score for free, including Experian or through some credit card providers.
With your credit score in hand, see how it stacks up against the scale. FICO scores are determined on a scale between 300 and 850. Here are the credit score ranges to keep in mind:
- Poor: 300 – 579
- Fair: 580 – 669
- Good: 670 – 739
- Very good: 740 – 799
- Excellent: 800 – 850
If you have poor or fair credit, there is a lot of room for improvement. Although a good or very good credit score should help you tap into reasonably affordable financing opportunities, the very best financing opportunities are only available to those with excellent credit.
After you know where you stand, you’ll know how seriously you need to take the rebuild. In some cases, you won’t need to take too many credit improvement steps. But if you are starting with a poor or fair credit score, you’ll want to utilize all of the credit-building opportunities at your disposal.
Monitor Your Credit Report
A credit report serves as the basis for your credit score. If you have positive information on your credit report, you should see a good credit score. But negative information on your credit report may lead to a bad credit score.
As you rebuild your credit score, it’s important to regularly check your credit report. While going through a divorce, it’s especially important to monitor your credit report to make sure nothing incorrect pops up. In some cases, you might find errors that are pulling your credit score down.
Although you can remove mistakes from your credit report, you can’t start the process unless you know there is a problem.
Build a New Budget
Whether or not you and your former spouse had a budget, it’s time to draft an entirely new budget for the next chapter of your life.
It’s likely that your finances will see some big changes after a divorce. A few common changes include a new household income and being stuck with certain financial responsibilities all on your own.
For example, you’ll likely see your household income drop as you transition from two incomes to one income. Plus, your new budget may need to consider the costs of your entire housing bill, which is a change from splitting the burden with a partner.
As you map out your new budget, make paying your credit accounts on time a priority. If some of your debt payments no longer fit into your budget, it’s time to make some changes. For example, you might decide to downsize your housing costs temporarily to pay down debt.
Everyone’s budget looks a little bit different. But don’t be afraid to make some big changes to your spending to reflect your new financial priorities.
Establish Your Own Bank and Credit Accounts
If you had joint accounts before your divorce, it’s time to create your own bank and credit accounts. Before opening these new accounts, you may want to change your name legally. After the name change is official, you can start building credit in your new name.
When choosing bank accounts and credit cards, look for options with no or low fees. You don’t want to fight against the tailwind of bank fees while you rebuild your finances.
Make On-time Payments
Payment history is the most critical part of your FICO score because it accounts for 35%, making it the most important factor in your score. With that in mind, on-time payments to your credit accounts are a big deal.
If you have a history of on-time payments, that should mean a higher credit score. But staying on top of your payments is sometimes challenging.
For those who struggle to keep up with due dates, turn to the credit-saving technology of autopay. The helpful tech will ensure that you never forget a payment again. Since most bills allow this option, it should help you avoid an accidentally missed payment.
However, autopay cannot solve deeper problems. For example, if your cash flow situation is tight, then you might miss a payment because you simply don’t have the funds available.
If you are experiencing a cash flow shortage, reach out to the creditor to explain the situation as soon as possible. Some lenders are willing to offer a temporary forbearance or change of due date for customers that usually pay their bills on time. It never hurts to ask for a helping hand when you need it.
Get Credit for Alternative Payments
What if you don’t have any credit accounts in your name? It’s possible to build credit with your other bills that aren’t considered a traditional credit account.
Some alternative payments that could build your credit history include subscription streamlining services, utilities, rent, and cellphone plans. Although these aren’t regular credit accounts that build credit automatically, they could if you work with the right service.
For example, Experian Boost is a free service that pulls payment information about select bills from your bank records. According to Experian Boost, the average user see their credit score rise by 13 points. Other options to get credit for rent include Rental Kharma and Rent Reports.
If you want to pursue credit through alternative payments, the bills must be in your name. Otherwise, it’s impossible to get credit. So, if you are splitting rent with a family member, it needs to be your name on the subscription if you want credit for it.
Open a Secured Credit Card
Secured credit cards offer a traditional way to build credit. If approved for a secured card, you’ll make a deposit that goes toward your credit limit.
Since the credit card issuer can seize your collateral deposit, it lowers the risk for them in case you don’t pay your bills on time. But if you can keep up with the payments, you’ll create a record of positive payments, which can help your credit.
If opening a secured credit card, beware of the relatively low credit limits. The low limits make it easy to create a high credit utilization ratio, which can have a negative impact on your score.
You can determine your credit utilization ratio by dividing your account balances by your total credit limit. For example, let’s say that you have a credit card with a $10,000 credit limit. If you have a balance of $7,000, then your credit utilization ratio would be 70%. If possible, try to keep your credit utilization to less than 10%.
Try a Credit-builder Loan
A credit-builder loan serves two purposes. It can help you build credit and savings at the same time.
Here’s how this unique loan product works:
The loan kicks off without receiving any upfront funds. Instead, you’ll start making regular payments to the lender. Each month, the lender puts the principal portion of your payment into a savings account with your name on it. And they’ll hang on to the interest portion of the payment.
As you make payments, the lender will report them to the credit bureaus. Making on-time payments should help your credit score. But a credit-builder loan can negatively impact your credit score if you don’t make on-time payments.
When the loan term ends, you’ll get to keep your savings.
Use Credit Repair
Credit repair removes inaccurate information from your credit report. This can improve your credit score because some mistakes have a negative impact.
You’ll have the option to pursue credit repair on your own by filing a dispute with the credit bureaus. If you provide enough information, the dispute should result in the removal of the mistake within 30 days.
Or you can opt to work with a reputable credit repair service. In either case, the result can lead to a cleaner credit report.
Add Credit Tradelines
When you remove negative information from your credit report, you’ll still need positive information to create a better credit score. That’s why adding credit tradelines can come in handy.
Credit tradelines include any credit accounts on your credit report. For example, a secured credit card or a personal loan both act as credit tradelines. It’s even possible to obtain a credit tradeline by becoming an authorized user on a credit card account.
Be Patient
Building credit is a long-term strategy. Although it would be nice to see the fruits of your labor overnight, that’s usually not how it works. It may take months to see real improvements to your credit score. With that, it’s important to stick with your credit-building strategies for the long term.
As you rebuild your finances after a divorce, stay focused on your big money goals. For example, building credit now could help you tap into affordable financing for the dream home you plan to buy in the future.
The Bottom Line
In some cases, a divorce will negatively impact your credit score. If you see your credit score drop after this major life change, don’t panic. Instead, implement smart strategies to rebuild the credit score you need for a bright financial future.
