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How Unemployment Can (and Can’t) Affect Your Credit
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If you’re looking for good news these days, you could follow the jobs numbers. The U.S. unemployment rate was 3.8% in February 2019. In October 2009 — months after the Great Recession ended — it was 10%.
Encouraging as those numbers are, there are still millions of people without jobs, and millions more facing real financial jeopardy should they lose their jobs tomorrow. That’s why it’s always good to understand the impact unemployment can have on your credit and long-term financial health. Here’s what you need to know.
What happens to your credit when you’re jobless?
The good news: Losing a job and collecting unemployment benefits have no direct impact on your credit report or credit score. When deciding whether to extend you credit, most lenders rely on the FICO Score, which is based on five factors — none of which is your income or job status. Neither is listed on your credit report, either.
The not-so-good news: Unemployment could have trickle-down consequences that can do serious damage to your credit.
4 ways unemployment can affect your credit
1. You may not be able to pay your bills on time
Your payment history is the most significant factor affecting your credit, accounting for 35% of your FICO Score. That means if you don’t have the funds to pay your bills on time, your score could take a pretty big hit. But don’t panic if you’re late just a couple of times. If your credit history is strong, a few months shouldn’t damage your score too much.
If your bills go to a collection agency or you have to file for bankruptcy, however, the hit could be significant.
2. Your credit card balances may increase
Thirty percent of your FICO Score depends on your credit utilization ratio, which is the amount of debt you owe relative to your credit limit. The higher the percentage of credit you’re carrying, the lower your score may be.
If you have to resort to credit cards to pay your living expenses, your credit utilization could rise, and your credit could take a hit, even if you pay your bills on time. And remember, if you’re just making the minimum payments, you’re probably racking up some pretty significant interest charges that can increase those balances, even if you’re not charging anything new.
3. Your savings account may shrink
The amount of money you have in savings isn’t factored into your credit score, but it can affect your ability to get a loan or a new credit card and the interest rate you’re given. Beyond your credit score, lenders look at all your assets, including your savings account. The higher your balance and the longer you’ve had the account, the less of a risk they’re likely to deem you, and the more willing they may be to grant you a loan with favorable terms.
4. You may have to resort to opening new credit cards
Even if you’re able to open a new credit card to help pay for living expenses while you’re unemployed, it may not be a good idea. Opening too many credit cards in a short amount of time can lower your FICO Score. Even the inquiries a company makes into your credit before granting you a credit card or loan can hurt your credit. It’s always best to avoid opening new cards for everyday living expenses if you can avoid it.
2 ways unemployment can’t affect your credit
1. Your employment status isn’t a matter of public record
While you may have to explain it on your resume or in a job interview, the fact that you’ve lost your job will never show up on your credit report. While some employers will pull your credit report as part of the hiring decision, there’s no information about your employment history included in it. Also, it’s important to remember that the Fair Credit Reporting Act (FCRA) says employers must get your permission before requesting your credit report.
2. Income is not part of your credit report
Your salary (or lack thereof) isn’t included in your credit report, and it’s not a factor in determining your credit score. That means if you’re able to pay your bills while unemployed and don’t have to rack up debt to do so, your credit score won’t necessarily be affected at all by unemployment. That’s yet another reason to make sure you have an adequate emergency savings fund.
What you can do to improve your credit
If your credit score does takes a hit due to unemployment, don’t despair. The damage is rarely permanent, and there are steps you can take to improve your credit score now. (You could also get help from a credit repair agency.)
Make payments a priority
Once you have a source of income again, make paying your bills on time a priority. Set up automatic payments or reminders if it makes it easier, but take all necessary measures to pay them on time. Also, pay as much as you can to begin chipping away at those balances and keep them low. Pay them off when you’re able.
Manage your accounts
While you should avoid opening new accounts when possible, you also don’t want to close old accounts. Keeping a zero balance is typically better for your credit score than closing a card altogether.
Wait it out
Even if you do nothing else, time is your friend when it comes to your credit score. As long as you begin paying on time again, late payments have less of an effect on your credit score every year, and are completely removed after seven years.
Unemployment adds tremendous stress to your life and can indirectly threaten your credit, but it doesn’t have to throw you into a financial tailspin. Knowing what does and doesn’t affect your credit is the first step to knowing how to make the best of an unfortunate situation.