How divorce settlements affect your credit score? What you need to know

Divorce is a financial change and also an emotional one, and it may affect a person's financial situation for several years to come. One of the most overlooked elements is, of course, the impact on a person's credit history from the financial decisions made during or after a separation.

In practice, absent the proper legal severance, loans, EMIs, and other financial relationships live on. And, if these financial relationships are not dealt with properly, these financial obligations can create missed payments, increase each party's debt-to-income ratios substantially, and ultimately lower both parties' credit scores.

1. Joint loan obligations

Divorce is not a legitimate reason for banks or NBFCs to terminate a joint loan on the individual's behalf. In other words, if you signed an agreement for the loan jointly with your spouse, you are legally required to repay or restructure the loans together for personal loan, auto-loan, or house loan commitments.

2. Alimony

Alimony or maintenance payments are a significant part of a divorce settlement. Consistently following through on these obligations is a great way to show the paying partner he/she fulfils their responsibilities in a financially responsible manner. If it is structured correctly, these payment rates have no negative effect on the credit profile; in fact, consistently making payments may show future lenders that you are credit worthy.

Swapnil Aggarwal, Director of VSRK Capital, quotes that, “A key financial aspect of divorce is alimony and maintenance. For the paying party, these obligations require careful planning. When managed sensibly, they don’t necessarily harm credit records. Timely payments can reflect financial discipline and positively influence credit history. However, if not planned properly, they may impact loan repayment ability or increase the debt-to-income ratio.”

He explained the impact on the receiving party also by stating, “Alimony can improve financial stability. A lump-sum amount, if invested wisely in mutual funds, can generate regular income. This can enhance the receiving party’s credit profile and loan eligibility altogether. When handled with financial discipline, divorce settlements can offer both parties an opportunity to rebuild and strengthen their financial future.”

3. Credit cards

Indian spouses commonly share credit cards. If, for example, a credit card holder does not remove their ex-spouse as an authorised user, the card could be charged, maxed out and even go into default. It is the card holder whose credit score is impacted.

4. Joint home loans

The mortgage could remain in both parties' names unless refinanced, even when one partner takes ownership of the house. If the new single holder fails to pay the mortgage, it will affect both credit scores.

How to safeguard your credit post divorce?

• Get a credit report from each of the major bureaus and check it.
• Don’t rely on a court judgment; look into refinancing or closing joint loans.
• Speak with banks to change your responsibilities and status.
• Unused cards attached to your ex should be frozen, and the permitted users removed.
• During the transfer, you should set up auto-pay or alerts for your EMIs, so you don’t miss any.

In conclusion, divorce not only terminates a relationship, it also triggers a financial aftershock in India, as families often share wealth. It is reasonable to protect your credit score at this stage; it is not selfish. Because still, your credit history will have a bearing on your financial future.

Disclaimer:Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.