Rebuilding Credit after Divorce |
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Your credit can be negatively affected by divorce
if you suffer a loss of assets or must close a high number of debts at
once. For the majority of your marriage, you and your spouse likely
spent time building shared assets and shared credit. When this cannot
occur any longer due to divorce, you lose the benefit of these efforts.
To save your credit, start planning prior to finalizing your divorce,
and take steps to immediately identify yourself as a private debt
holder no longer associated with your spouse.
Follow Up with Closed Debts
It is essential that you ensure all debts incurred during your
marriage and divorce are paid in full prior to establishing yourself as
single. For example, you may have legal debts from the divorce. If your
spouse was ordered to pay a portion of these debts, stay on top of
these payments. Contact the lender regularly to ensure that the
payments have been made. If you move out of the home during a divorce,
make sure the mortgage payments are made as long as your name is on the
loan.
Refinance Home Loans
The first step for rebuilding your credit after divorce is to
terminate any joint loans you have with your spouse. In most cases, the
primary joint debt will be your mortgage. You have a few options to
save your credit in this case, but you should be very careful
throughout the process, no matter which option you choose. One option
is to sell the home and repay the debt. This can help your credit
because it will show that you repaid a large debt.
However, often one spouse would like to stay in the home. This
is where there can be a problem. The home loan
must be refinanced to show a single borrower. If this borrower is you,
your credit may be slightly dinged temporarily due to the refinance,
but you can rebuild your credit by continuing to make mortgage
payments. If your spouse is the one keeping the home, you will lose the
equity, and you will also suffer the same ding to your credit without
the ability to continue repaying the loan. In this case, be sure to
negotiate with the lender to avoid negative consequences to your credit.
Establish Financial Independence
Once your loans have been settled or split, you must establish
financial independence. This means opening your own bank accounts and
credit cards. Additionally, you should begin to consider your personal
asset base as a single individual. Which assets did you keep in the
divorce? Which assets did you lose, and how can you replace or rebuild
these assets? For example, if you lost the home in the divorce, your
credit may be suffering from this loss of asset base. You no longer
have the home to use as collateral for debts, and your debt-to-asset
ratios may be largely thrown off. Your credit score may be too low for
you to consider taking a new mortgage at this point. Instead, consider
taking a car loan or personal loan that will begin to establish your
independent payment record.
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