How to Rebuild Credit After Divorce

Divorce can an incredibly difficult process for anyone to go through, and apart from every other consideration one must take into account at this time, it’s also imperative not to forget about the importance of maintaining a good credit score.

Unfortunately, that’s often much easier said than done, and that’s particularly true because of the likelihood that divorcing couples had at least a few joint accounts in their names that will then have to be squared away before both parties can really begin to fully rebuild credit in their own name once again. The thing about a joint account is that it counts equally for both spouses, meaning that any missteps in dealing with it made by one will impact the other, regardless of whether they had a say in the financial decision.

As such, taking the time to try to deal with these accounts together in a comprehensive and responsible manner is of the utmost importance. At this time, closing the joint accounts is likely the best idea possible because it will possibly help divorcing borrowers strike out on their own once again.

Where to start
When divorcing couples want to begin going through the process of shuttering existing joint accounts, the first thing they should do is see which have the highest interest rates and outstanding debts. While it may seem intuitive to take steps to pay down the latter as a means of reducing the total amount owed, it’s actually wiser to make sure accounts with the highest rates are cut into first. That’s because those higher-rate accounts can accrue a larger amount of debt more quickly than their lower-rate counterparts, meaning that if couples don’t take steps to reduce them first and foremost, they will likely run into more trouble down the road.

At this time, couples may hit snags related to who owes what on what accounts, and that can certainly complicate the repayment process, but working out a plan for cutting down these debts is of the utmost importance so that both can get a fresh start in their new lives.Â

How to do it
This part of the process won’t always be easy, because it takes a lot of cooperation and dedication to pay down outstanding jointly-owned debts. In some cases, couples might choose to undertake the process through a balance transfer to cards in individual names — though that comes with the tricky prospect of figuring out exactly how to divide up debt — which can be beneficial because, as with many balance transfer accounts these days, it may give access to significantly lower interest rates than what was being paid before.

It’s also important at this time to make sure payments are getting to lenders by their due dates and in full. That’s because payment history alone makes up 35 percent of a borrower’s credit rating, and therefore any missed deadline can have a significant impact on both spouses’ scores. Therefore, putting aside whatever issues may arise in the process of a separation to make sure at least the minimum payments are making their way to various lenders every month is incredibly important to maintaining financial health so that the process of rebuilding credit once the divorce is finalized isn’t more complicated than it already might be.

Be aware of these issues
However, it should also be noted that when you close existing accounts, one might take a bit of a hit with regard to their credit score, and it’s one that likely won’t be easy to make up any time soon. That’s because 10 percent of a borrower’s rating is based on the average length of time for which they have had all their accounts, and generally, the longer one’s borrowing history, the better off the scores will be. But because they’re closing these accounts out of necessity, that small hit might be worth it for a short while.

Another way this might affect a borrower, particularly once they close old accounts they’ve cleared of debt is through a factor known as credit utilization. In short, it means how much credit a borrower is using versus the total value of all their credit limits. Closing accounts will obviously reduce the latter portion of this consideration, and therefore carrying less debt will obviously be incredibly important at this time. In general, lenders want to see borrowers with utilization ratios of 30 percent or less to maximize this aspect of their score.

Finally, during the divorce process, it’s probably also a good idea to order copies of one’s credit reports so that they can be checked over for unfair markings. These entries can have a significant negative impact on one’s rating, and if any are discovered, working with a credit repair company may be able to put things back to where they deserve to be.