How a New Job Can Affect Your Credit
After months of searching, it’s finally happened: You got an offer for a new job. But as with anything that impacts your finances, you might be wondering how a change in employment will affect your credit.
Will the bump in pay add points to your score? Could leaving your old company cause your credit score to drop?
“A new job doesn’t have an immediate effect on your credit score, but it could lead to beneficial things that influence your score,” said Peter Klipa, senior vice president of creditor relations at the National Foundation for Credit Counseling, a nonprofit organization that offers financial counseling.
Here are some of the ways your score might change when you take a new job.
4 ways a new job can affect your credit
You probably won’t see your credit score change immediately after taking a new job. But over time, your credit score will likely reflect the financial and lifestyle changes that come with growing your career. Let’s explore some of the most likely scenarios.
Your income increases
Moving to a new company is a no-brainer if it comes with a significant salary boost. While your income is not a factor in your credit score, it can be taken into account by lenders when you apply for a loan.
The extra money you’re now earning at a new job could have a positive effect on your credit score if you use it in the right ways.
“If you were behind on bill payments before the new job, using the higher income to get caught up and make more payments will help your credit score,” Klipa said. “You may also decide you want to take out an auto loan to buy a new car, which will change your credit mix and improve your score.”
Higher pay could give you a better debt-to-income ratio. This may allow you to consolidate high-interest debt, pay off your balance sooner and improve your credit utilization ratio, resulting in a higher credit score.
Your income decreases
People change jobs for all sorts of reasons beyond salary. Whether you’re switching companies to get better benefits, align your work with your passions or find a better work-life balance, a new job might also come with a cut in pay.
Lower pay could make it harder to keep up with your bills or make payments on time, which could lower your credit score. (If you need help with your credit score, a credit repair agency is an option.)
If your income decreases and you find yourself needing to apply for a personal loan, a lender will perform a hard credit inquiry, which could take a few points off your credit score — although bettering your credit mix could benefit you at the same time.
Before you accept a new job with a lower salary, take a look at your budget to make sure you’ll still have enough to cover your expenses.
You have to wait for your first paycheck
Depending on the date you’re hired, you might need to wait one or two pay cycles before you receive your first paycheck. The interruption in regular income might indirectly cause your credit score to drop.
For example, if you miss a due date on a bill while you’re waiting for your paycheck, your score could fall. Remember to be cautious through this process.
“You can’t go out and buy up everything you want on store shelves based on anticipated yet unrealized income,” Klipa said. “Pace yourself.”
You take a closer look at your finances
You know all that paperwork you fill out when you start a new job? That tedious task often forces you to take a close look at your finances and make smarter decisions going forward, which could impact your credit score.
“So much of job consideration comes down to the benefits, like health insurance and your 401(k), and we all have to set up our tax and payroll deductions going into new employment,” Klipa said. “This serves as an opportunity to go into our long-term savings and financial plans in greater depth, which could have a positive outcome on our credit scores.”
Taking advantage of the opportunity to streamline your finances and potentially find some room in your budget to make bigger payments on your debt — and bring down your credit utilization — could result in a higher credit score.
How is my credit score determined?
The way a new job affects your credit score varies from person to person, depending on individual choices and financial circumstances. Understanding the factors that affect your credit score could help you make smart decisions about money throughout your career. Here’s how your FICO Score is calculated:
Payment history (35%): The most influential factor in your FICO Score is your history of making on-time payments. Late payments can cause good credit scores to plummet and make it harder for people with bad credit to recover. The payment history also takes into account how late your payments are (such as 30 or 90 days late), any bills that have gone to collections and derogatory marks from things like foreclosure or bankruptcy.
Amounts owed (30%): Your FICO Score takes into account the way you use your credit, including your total debt, the balances on each of your accounts and how many accounts you have with a balance. Your score also factors in your utilization rate, or the percentage of your available credit that you’re using right now. Using lower amounts of your available credit can have a positive impact on your score.
Length of credit history (15%): The age of your accounts can move your FICO Score up or down. That includes the dates you opened your oldest and newest accounts, the overall age of all your accounts and recent activity on your accounts. Longer credit history can have a positive effect on your FICO Score.
New credit (10%): Your FICO Score depends on how recently you opened a new account and whether you’ve been applying for new lines of credit. When a lender runs a hard inquiry on your credit report, it could cause a minor dip to your credit score. Soft credit inquiries, which occur when you check your own score online or you get preapproved for credit, do not affect your credit score.
Credit mix (10%): The quantity and variety of accounts you have open and closed play a role in your credit score. Having a diverse mix of credit, such as a credit card, student loan and a mortgage, can add points to your score.
Major life changes, such as a new job, can have a big impact on your finances. Keeping a close eye on your budget, bills and spending can help you make the most of your money — and keep your credit score high.