Credit Scores Can Take Nosedive If Divorcees Accrue Much Excess Debt

Divorcees likely have a lot more on their minds than credit health when going through what is typically a lengthy and arduous process, but at the same time, it's often vital that they do all in their powers to make sure all aspects of their finances stay as healthy as possible so they can count on affordable financing when they come out the other side.

There are two ways in which many people who are going through a divorce may put their finances and credit at risk. One is simply missing payments into their various accounts and therefore seeing their scores tumble considerably because 35 percent of borrowers' scores are made up of this factor alone. However, one that's likely far more common simply because of the financial strain a divorce process can bring to both spouses is taking on too much debt, which can endanger both their monetary situations and their credit.

Why is too much debt a bad thing?
There are two reasons that it may be difficult for both members of separating couples to regain complete financial independence and self-sufficiency if they start relying too heavily on credit card debt to make ends meet during the divorce process. The first relates to how much of a financial commitment it will involve to get out from under those balances once they have begun to regain their financial footing.

Taking on thousands of dollars or more in new credit card debt may seem like the only option to many borrowers when their money is tied up elsewhere during a divorce, but those borrowers will likely end up paying a hefty price for doing so when the process is complete, both literally and figuratively. High balances in turn often lead to high minimums which may be difficult for many recent divorcees to pay. Moreover, these higher payments can significantly decrease the value of the same amounts borrowers used to pay into their balances; federal laws require that any amount paid into credit card balances in excess of the listed minimum must be applied to the principal, which pays down the overall debt in a quicker fashion. But if a borrower's minimum payment goes up from $75 to $100, for instance, and that person was accustomed to paying $100 into their balance every month that eliminates the excess contribution previously designed to more quickly reduce debt. That means payments of the same value no longer carry the impact they once did, and that it's more difficult to reduce what is now a potentially much larger debt load overall.

But moreover, this type of spending habit can put a borrower's credit standing in serious jeopardy. That's because the amount of credit being used at any one time versus a person's total limits across all cards — known as their "credit utilization ratio" — makes up 30 percent of his or her credit score. In general, lenders only want borrowers to carry about 30 percent of their available credit limits in order to maximize this portion of their ratings. But those who take on thousands of dollars or more in credit card debt over the course of just a few months can quickly increase their ratios and commensurately cut their scores in short order.

As a consequence of both the fact that larger balances make payments less valuable when it comes to reducing debt, and because of the damage these added funds can do to a person's credit standing, it's vitally important that those who have slipped into such a borrowing pitfall do all they can to get their finances together once again. That should include making larger payments than they may have been accustomed to earlier in their borrowing lives, as a means of more quickly getting their finances under control overall.

Other potential concerns
Divorcees might also face issues related to missed payments simply because all the debt they took on leaves them unable to make their minimum monthly payments, but there are other problems that might arise as well. For instance, those who previously held joint accounts with their now ex-spouses might have to take on new accounts as they close old ones, and that in turn can lead to diminished credit standings temporarily, because the average length of time a person has had all their various accounts makes up another 15 percent of a score.

Those who have come out the other side of the divorce process might also want to consider taking the time to check their credit reports for any unfair markings that may appear in their names. If any such entries are discovered, it can be wise to seek the help of a credit repair law firm, which may be able to quickly put the issues to rights and return borrowers to where they deserve to be.