The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I’ve been divorced for more than three years. In my agreement, I gave full ownership of land and house to my ex-wife with the understanding that she refinance and get my name off. It’s been three years and she says that her credit is too bad and still cannot get refinanced, though I know that she is making all payments and is steadily self-employed. This is had a terrible effect on me, I cannot get a decent loan because of this. What should I do?
Divorce can have long-term and unanticipated effect on your credit, especially if you are dealing with an uncooperative ex-spouse. The most important thing for you to do now is to review your divorce decree and talk to a family law attorney to discuss your options. If your lawyer concludes you have a case and your ex-wife is breaching your divorce decree, you may be able to take legal action to make her comply or indemnify you.
A divorce decree and your mortgage
A divorce decree is a legally binding contract between you and your ex-wife. Your mortgage company—or any creditor, for that matter—won’t care what it says as long as you signed the contract jointly. If you signed the mortgage note, you are responsible for the loan, even if it’s in default. And they can come after one or both parties to collect payment if necessary. Usually, the most common way to be removed from a mortgage is through refinancing. There are other options to remove someone from a joint mortgage, such as a loan assumption or modification. However, if your ex-wife does not meet the lending criteria to refinance, it is unlikely that she will qualify for other options that require her to be financially ready to show she can manage the loan by herself. It’s still worth a shot to reach out to your mortgage lender and determine what options they can give you. Yet, another option is to sell the property. Unfortunately, whatever option you choose will still require your ex-wife’s cooperation unless the courts are involved.
Your mortgage and your credit
It’s essential to determine why you don’t qualify for a decent loan. There could be multiple reasons, and being on that mortgage can be just one of them. If your ex-wife has been making on-time mortgage payments, your credit score should not be affected negatively. On the contrary, it can help boost your score and add a positive credit history to your credit report. But, having a large mortgage, additional debt, and a low income may disqualify you from qualifying for a new loan with decent terms because you will have a high debt-to-income ratio (DTI). Lenders review your DTI to help determine your repayment ability. To roughly calculate your DTI, add your debts (credit card payments, loans, rent, and mortgage, etc.) and divide your total by your gross monthly payment, which is your income before taxes. That percentage should give you an idea of how the overall debt in your credit report compares to your current income. If it’s too high, you may want to decrease the balance in some of your debts and increase your income.
Focus on the now
I suggest you review your credit reports to identify any other potential areas of improvement while you find a solution to deal with your ex-wife. You can get free weekly credit reports from Experian, TransUnion, and Equifax through AnnualCreditReport.com through April 2022. Overall, an excellent way to boost your credit is always to make your payments on time, keep balances low and ask for credit sparingly. In your situation, you are somewhat limited on what you can do to ensure the on-time payments of the mortgage without the cooperation of your ex-wife. Focus on what you can do now and work with a family law attorney to determine what legal recourses you may have to make your ex-wife comply with your divorce decree. Good luck.
Many people are uncertain about what may happen to their credit when they get married and what can happen to their credit if they get divorced.
For example, it is commonly believed that your credit report merges with your spouse’s credit report when you get married.
Is that really true? And what happens to your credit when you get divorced?
Keep reading for an in-depth explanation of what happens to your credit score when you get married or divorced.
What Happens to Your Credit When You Get Engaged
Technically, nothing directly happens to your credit score as a result of getting engaged. However, becoming betrothed to your future spouse can come with pressure to go into debt, and can thereby indirectly affect your credit.
Financing the Engagement Ring
The first major purchase for a couple planning to marry is often the engagement ring or rings. Many people still hold onto “traditional” ideas about how much one “should” spend on an engagement ring and want to be able to purchase an expensive ring for their partner. The average cost of an engagement ring in 2019 is nearly $6,000!
Those who don’t have the cash on hand to pay for a lavish ring may feel that they need to finance one in order to please their partner or keep up with the Joneses, but be mindful of the impact this could have on your credit.
If you want to take advantage of an in-house financing plan at the store where you are purchasing the ring, you’ll likely have to open a retail credit card with the store. The inquiry on your credit report might ding your credit score by a few points, and the new retail card account will lower your average age of accounts, which is also likely to affect your score.
In addition, if the credit limit of the store card is close to or the same price as the ring, then your individual utilization ratio will be very high or maxed out on that account, and it will also contribute to an increase in your overall utilization ratio. This makes you look riskier to lenders and thus has a negative impact on your credit score.
Before financing an engagement ring, make sure you know how it could affect your credit.
Another way to finance an engagement ring is to take out a personal loan. Taking out an installment loan is generally less damaging to your credit score than opening a new revolving account such as a credit card and maxing it out immediately. However, the downside of taking out a loan to pay for the ring is that you will have to pay interest on top of the price of the ring, whereas with in-store financing you may be able to take advantage of an interest-free promotional offer.
Regardless of how you may choose to finance the jewelry, unfortunately, going thousands of dollars into debt for a ring can bring down your credit score, especially if you become overextended and can’t keep up with the payments.
Paying for the Wedding and Honeymoon
While the cost of an engagement ring can certainly get quite expensive, it typically pales in comparison to the cost of the wedding ceremony and reception.
Planning a wedding involves paying for a venue, catering, photography, flowers, invitations, and much more, and all those expenses can add up quickly. In 2018, the average amount spent on weddings in the United States, not including the cost of the honeymoon, was almost $34,000.
While it used to be commonly expected for parents to foot the bill for weddings, now, spouses-to-be are increasingly paying their own way, even if that means going into debt. Business Insider recently reported that 28% of American couples go into debt to pay for their weddings.
The expenses don’t stop there if you want a traditional honeymoon, which can add several thousand dollars to the total—over $5,000, on average.
The average cost of a wedding in the U.S. is over $30,000, and many couples resort to taking out loans to pay for their nuptials.
Needless to say, on top of the staggering amounts of student loan debt that many couples are already saddled with, spending money you don’t have to shoulder the astronomical cost of a wedding can lead to even more credit struggles.
How Does Marriage Affect Credit?
Although many people seem to believe that your credit report combines with your spouse’s credit report after you tie the knot, this is a misconception. After you get married, both parties still retain their individual credit histories and credit scores. Your partner’s accounts will not be added to your credit report and vice versa.
There is no such thing as a shared credit score for married couples. In fact, your credit report will not even indicate your marital status or your spouse’s name.
Does Marriage Affect Your Credit Score?
No, getting married does not directly affect your credit score. Since your credit report does not change when you get married, neither does your credit score.
However, just like when you get engaged and plan your wedding, your credit may be indirectly affected by your marriage due to financial actions that you may take as a married couple.
Applying for a Mortgage
One of the most important financial decisions a couple can make is whether to apply for a mortgage to buy a home and, if so, whether both parties will apply jointly or whether the spouse with the best credit score will apply individually.
If you get a joint mortgage with your spouse, make sure you are on the same page about who will be responsible for making payments.
If both you and your partner have already established a credit history before entering the marriage, then it is likely that you will have different credit scores. In some cases, your scores may be in the same credit score range, while in others, the gap may be substantial. Ideally, all couples would do well to discuss finances before committing to marriage so that no one is surprised by a bad credit score after you have already taken the plunge.
If one spouse has bad credit while the other does not, the lower credit score could damage your chances of getting approved for a mortgage or getting the best rate on your loan. In this case, it might be a better idea for the spouse with good credit to apply in their name only, or else you could end up owing tens of thousands of dollars more on your mortgage thanks to a higher interest rate.
On the other hand, if your credit scores are similar, then it would probably make sense to apply for the home loan jointly. Assuming both partners have decent credit, then applying for a joint mortgage may offer certain advantages. Namely, both your income and your partner’s income will be considered, which could allow you to apply for a larger loan than if you were just relying on one person’s income.
While getting a mortgage is certainly a huge milestone and financial commitment, since it is a type of installment loan, having a lot of mortgage debt won’t affect your credit as much as revolving accounts do.
However, it’s how you and your spouse manage the mortgage together that can have a significant impact on your credit. With a joint mortgage, both parties are responsible for paying the bill on time. If your partner is in charge of paying the mortgage bill and one month they miss the due date and get a 30-day late, since you are equally responsible for the joint account, that late payment will also show up on your credit report and can bring down your score.
Opening Joint Credit Accounts
Besides applying for a joint mortgage, there are other types of joint credit accounts that married couples may open together, such as joint credit cards or joint auto loans.
This can allow couples to more easily manage their shared finances together. As we discussed in “The Fastest Ways to Build Credit,” if one spouse doesn’t have the credit score to get approved for an account on their own, then applying for a joint credit account with their partner can be a good way to help them build credit.
As with a joint mortgage, opening any other type of joint credit account together means you can both be held fully responsible for the debt. That can be a risky move since it means you can be held accountable and your credit score will suffer the consequences if your partner shirks their financial responsibilities.
Credit piggybacking as an authorized user can help build credit if one spouse’s credit file is thin or less than perfect.
Becoming an Authorized User
When one spouse has better credit than the other, then the partner with good credit can add the other as an authorized user to one or more of their credit cards with positive payment history.
This practice, known as credit piggybacking, often results in the age and payment history of that positive account being added to the credit report of the authorized user. This can be a great way for a spouse to help their partner build credit.
In addition, unlike opening a joint account, it’s low-risk for the authorized user, who can remove themselves from the account at any time if the relationship goes south or the account becomes derogatory.
Does Divorce Hurt Your Credit Score?
Although no one goes into a marriage planning to get divorced later on, unfortunately, divorce is a reality for many couples. To protect your credit, it’s important to be realistic about the possibility of divorce and to keep it in mind when making financial decisions.
Now, let’s answer the question of whether getting divorced can hurt your credit.
If you have been operating under the belief that your credit report merges with your spouse’s when you get married, then you might have assumed that getting a divorce will hurt your credit. However, as we have seen, the act of getting married itself does not affect your credit. It’s how you manage your credit that determines how your credit score might change.
Getting a divorce can be very costly, but if you want to keep your credit in tact, don’t neglect your other bills.
The same idea applies when getting a divorce. Your change in marital status will not be shown on your credit report and will not have any bearing on your credit score. However, it is certainly possible that getting divorced from your spouse can affect your credit by other means.
The Cost of Getting a Divorce
Since you’ll most likely need to hire legal counsel, unfortunately, getting a divorce can often be quite costly. This can make it more difficult to keep up with the rest of your bills. Do whatever you can to pay all of your bills on time so that you don’t end up with any minor or major derogatory items on your credit report.
If you’re really struggling to stay afloat financially in the midst of a divorce, reach out to your creditors and ask if there are any ways in which they can accommodate your situation in this time of financial hardship. For example, some lenders may be willing to lower your payments temporarily or even let you postpone a few payments.
In addition, you could also consider getting a personal loan to help pay for your expenses until you can get back on your feet financially after your divorce.
Managing Your Joint Accounts While Going Through a Divorce
As we discussed previously, many married couples may end up with joint credit accounts, such as a mortgage, an auto loan, or joint credit cards. Getting a divorce doesn’t nullify the debt or release either party from financial responsibility. It’s a legal agreement between you and your ex-partner, not with your creditors. Your joint debts still need to be paid.
In a divorce, it can be hard to resolve who will be responsible for paying off the debt and canceling joint accounts, especially if there are strong emotions at play.
A divorce agreement may dictate who is responsible for paying joint bills, but your lenders can still hold both of you responsible for the debt.
Although a judge may assign certain debt repayment responsibilities to each party, again, this is not an agreement with the lenders, who care only about whether your bills get paid, not who pays them. Both of you can still be held liable for joint debts by the lenders.
If your ex agrees in court to pay off a joint account but doesn’t follow through, those missed payments can damage your credit score just as much as it hurts their own. If the account goes into collections, that could be disastrous for your credit.
Since you may not trust your ex to responsibly manage shared credit accounts, you’ll probably want to pay off and close any joint accounts as soon as possible.
Unfortunately, most lenders don’t allow one person to be removed from a joint account, so you can’t simply convert it to an individual account. Instead, you will most likely need to close the account altogether and then apply for a new account on your own.
As you may know from our article about closed accounts, closing an account hurts your credit utilization. If you have to close any joint credit cards that you had with your ex-spouse, for example, the credit limit of those cards will no longer be factored into your overall utilization ratio. As a result, your utilization is going to go up and your credit score likely could go down, since credit utilization is 30% of your FICO score and about 20% of your VantageScore.
Ideally, you and your ex could decide how to assign responsibility for your joint debts outside the courts. If all goes smoothly when divvying up and paying the debts during your divorce proceedings, then your credit could theoretically remain unscathed aside from the hit to your credit utilization.
However, things can get messy quickly if there is any conflict as to who should pay certain bills.
If your ex decides they don’t want to make payments on a debt that they were supposed to pay, or even if they simply make a mistake and forget to pay, then your credit will suffer from those missed payments unless you pick up the slack. Since payment history is the biggest factor in your credit score, this situation has the potential to destroy your credit.
If your ex-spouse misses a payment on a joint debt, that negative mark will also affect your credit.
Let’s say you didn’t know your ex was behind on payments and the account went to collections. Then you would have a major derogatory on your credit report, through no fault of your own!
What Happens to a Joint Mortgage When You Divorce?
Resolving the question of what happens to your joint mortgage after your divorce can also get tricky, but there are several options to consider. Each of these options will likely affect your credit but in different ways.
Option 1: Sell the House
If you and your ex-spouse agree to sell the home, you can use the proceeds from the sale to pay off the joint mortgage and then go your separate ways. In this situation, by paying off the mortgage early, you cut out the risk of either party missing mortgage payments down the road and damaging your credit.
Some states have community property laws that may necessitate selling the house in order to split up everything you and your spouse owned together unless both of you can reach an agreement on how to divvy things up.
The downside of selling the house is that now both of you will have to find somewhere else to live, and buying another house when you’re divorced can be a challenge, as we will elaborate on below.
Depending on how the housing market is doing when you get divorced, it’s possible that you could end up owing more on the mortgage than the house is currently worth. In this case, your bank might agree to a short sale, where you sell the house for an amount that is less than what you owe toward your mortgage.
Often, the simplest solution for dealing with a joint mortgage after a divorce is selling the house and using the proceeds to pay off the mortgage.
Unfortunately, a short sale is considered a settlement, which means it is a major derogatory item on your credit report, so a short sale should be your last resort if the goal is to preserve your credit.
Of course, selling the house is not always possible, as one spouse may want or need to stay in the home, which brings us to the next possibility for dealing with your joint mortgage.
Option 2: Refinance the Mortgage in One Spouse’s Name
If someone needs to remain in the home, then the joint mortgage will have to be refinanced in one person’s name. This requires that one party has enough income and an adequate credit score to qualify for a mortgage on their own.
If your credit is not quite where it needs to be to refinance the mortgage in your name alone, you could try to boost your credit score with some quick fixes such as decreasing your credit utilization or increasing your credit limit. Then you can request a rapid rescore from your mortgage lender to see an immediate increase in your score.
Ideally, the person who will continue to live in the home would be the one refinancing the mortgage in their name. This removes the liability from the spouse who is no longer living in the home, meaning that if the new sole mortgage owner fails to make on-time payments, the other person’s credit will not be punished for it.
However, this is not always the case. When the opposite is true, i.e. the spouse not living in the home becomes responsible for the mortgage, there can be problems. For example, if you are the one staying in your home and your spouse is supposed to pay the mortgage, but instead, they default on the loan, you could be at risk of your house being foreclosed by the bank, even though you weren’t at fault for the missed payments.
Option 3: Buy Out Your Spouse and Keep the Home
In some states, the equity of a shared home is split between the two parties in the event of a divorce.
If this is the case for you and you want to keep the house, you can try to raise enough cash to buy out your spouse’s portion of the equity in the home.
To raise funds, you could apply for a home equity loan, which is essentially a second mortgage. Alternatively, you could take out a personal loan. Of course, getting approved for a personal loan will be dependent on your credit and income, since it does not use your home as collateral.
Option 4: Keep the House and the Existing Mortgage
Keeping the joint mortgage and continuing to live in the home with your ex-spouse may not be ideal, but it could save you some money.
In some situations, it may be most practical or even necessary to continue cohabitating with your ex-spouse and keep the mortgage as-is. Although this arrangement is obviously not ideal, it could give both parties some extra time to get their credit in shape to either refinance the mortgage or sell the home and buy a new home.
Buying a New Home When You’re Divorced
In going through a divorce, there’s a good chance you’ll have to move out of your house and find a new home. Unfortunately, according to Forbes, if you have recently gotten divorced or are currently undergoing divorce proceedings, this can affect your chances of qualifying for a mortgage.
Since one of the important factors that mortgage underwriters look at is your debt-to-income ratio, it can be difficult to get approved for a mortgage on a second house when you’re still paying off another mortgage.
Therefore, if your ex-spouse cannot refinance the mortgage in their own name, then you may have to wait until you sell the home that you shared with your ex-spouse before trying to get a loan to buy a new place.
How to Rebuild Credit After Divorce
If your credit has taken a beating as a result of your divorce, the good news is that there are steps you can take to repair your bad credit.
Pay all of your bills on time to help rebuild a positive credit history, increase your credit age, and outweigh any derogatories that you may have gotten. Consider getting a secured credit card or a credit-builder loan to establish primary accounts in your name. Get added as an authorized user to a seasoned tradeline. This can add years of credit age and perfect payment history to your credit report.
Options for rebuilding credit include applying for a credit-builder loan, getting a secured credit card, and being added as an authorized user to a seasoned tradeline.
Conclusions on How Getting Married or Divorced Can Affect Your Credit
By now, you know that the myth that you and your spouse merge credit reports when you get married is not true and that neither getting married nor getting divorced have a direct impact on your credit. However, there are a multitude of ways in which your marital status can indirectly affect your credit.
Firstly, getting engaged and planning a wedding may often mean going into debt in order to pay for the rings, the wedding ceremony and reception, and the honeymoon. This can affect your credit utilization ratio, and if having all that debt leaves you overextended, then you could end up missing payments and getting some derogatory items on your credit report.
Once you are married, your credit will be affected by any joint accounts you and your spouse open together, such as a mortgage. It’s important to be on the same page as your spouse when it comes to managing joint accounts in order to reduce the risk of your credit being damaged by your spouse’s mistakes (and vice versa).
It is true that many people struggle with their credit after getting a divorce, not because of their divorced status per se, but because legally separating from your spouse is expensive, and it creates complications for your joint credit accounts that can be difficult to resolve.
However, you don’t have to let a divorce ruin your credit. Try to come to an agreement with your ex-spouse about how to split up financial responsibilities. If your credit does take a hit during your divorce proceedings, you can rebuild your credit by becoming an authorized user and opening up new primary accounts in your name.
Many people are uncertain about what may happen to their credit when they get married and what can happen to their credit if they get divorced.
