Enjoying Your Retirement

Posted on: 8 June 2016

Divorce can do a number on your credit score but not because of the legal proceedings. The trouble often comes from the problems that occur when two people separate their financial lives. Losing a source of income can make it hard to keep up with the bills. Sometimes one spouse will default on a credit card to spite his or her ex, which hurts both their credit ratings. But even if you don't have these specific issues, there are two surprising ways getting a divorce can hurt your credit. Here's what you need to know.

Closing Accounts Can Hurt Your Credit Utilization Ratio

When lenders evaluate your credit history to determine whether or not to loan you money, they look at your credit utilization ratio, among other things. This is the amount of credit you are using in relation to the amount you have available (e.g. a $500 balance on a card with a $1,000 limit). It's believed high ratios are indicative of poor money management skills or financial trouble, which is why your credit score gets dinged when your ratio goes above 30 percent.

It's highly recommended that you close joint accounts when you get divorced to avoid becoming liable for the account balances if your ex stops paying. However, when you close an account, the credit limit is set to zero. This has the unintentional effect of raising your utilization ratio because—in the eyes of the reporting agency—you now have less credit available, even though you may not have charged anything new.

You can minimize the damage this does to your credit score by paying down the balance on your open accounts to decrease your utilization rate. If your spouse used this account, ask for money to help cover his or her portion of the bill. Other options include opening a new credit card or increasing the credit limits on your existing accounts.

Closing Accounts with a Balance Can Lower Your Score

Closing an account with an unpaid balance can also take a bite out of your credit score. As noted previously, the credit limit is set to zero when an account is closed. Any balance remaining on the account will make it look like you've gone over your limit.

Unless your ex is being unreasonable or you are concerned that keeping the account open will cause more problems, you may want to hold off closing it until the balance has been paid in full. Alternatively, you can try to have your ex's name removed from the account (or vice versa, depending on who's responsible for the debt). If you have your ex's name removed, you can pay down the debt at your leisure without worrying he or she will do something irresponsible with the account. If your spouse removes your name, the account will no longer be reported on your credit profile.

For more tips on protecting your credit while getting divorced or to obtain a loan to help you pay off debt incurred during your marriage, consult with a credit or an installment loan specialist.