Does Filing for Unemployment Affect Your Credit?

Filing for unemployment will not directly affect your credit score. However, it can have ripple effects on your financial circumstances that indirectly impact your credit.

Losing a job is incredibly stressful and can cause you to make drastic lifestyle changes to accommodate for the loss in income. Unfortunately, this can happen to anyone, as we have seen with the Covid-19 pandemic. While your immediate concern is likely how it will affect your financial health, another question that may come up is the impact claiming unemployment will have on other parts of your life.

The good news is that filing for unemployment will not directly affect your credit score. However, it can have indirect effects on your credit based on how well you navigate unemployment. We will go over the various ways an unemployment claim can affect your life and ways you can plan ahead.

Key Takeaways

  • Your credit report does not include any information about your employment status, income level, marital status, or bank balances. If you file an unemployment claim, that will not appear on your credit report. However, it does include personally identifiable information (PII), account history, and public records.
  • Being unemployed can indirectly affect your credit if your credit utilization increases or you fail to make on-time payments. It also becomes harder to get approved for loans or new credit cards if you do not have a steady source of income.
  • A few ways to protect yourself include filing for unemployment, setting up an emergency fund, negotiating with creditors, creating a budget, and looking for promotional deals.

Why Your Credit Score Matters

Your credit score is a three-digit number, ranging from 300 to 850, that allows potential lenders to assess your risk as a borrower. If you have a low credit score, it will be harder to get approved for a loan from lenders such as banks and credit card issuers, and you may also face higher interest rates if you get approved.

Components of a Credit Score
Components of a Credit Score

Your credit score consists of five factors:

  • Payment history – 35%
  • Credit utilization – 30%
  • Length of credit history – 15%
  • Credit mix – 10%
  • New credit -10%

Each factor is weighted differently, with payment history and credit utilization making up the majority. Any score above 670 gets considered a good score, while anything above 800 is excellent. Because payment history and credit utilization are weighted heavily, your credit score can get indirectly impacted if unemployment prevents you from paying bills.

Information on Your Credit Report

Before diving into the effects that unemployment can have on your credit score, let us first understand what information your credit report does and does not contain. Your credit report does not include any information about your employment status, income level, marital status, or bank balances. That means if you file for unemployment compensation, that will not appear on your credit report.

Your credit report will include personally identifiable information (PII), account history, and public records. PII includes information such as your name, current and former addresses, Social Security number, date of birth, phone numbers, and employers (if you have noted them on previous credit card or loans applications). Creditors will not use your employment history to determine whether they should work with you, but they might cross-check that information to verify your identity.

Account history includes all your credit cards and loans, account balances, when you got the credit, payment history, credit limits or loan amounts, and your account standings (such as current, closed, or past due). If you file bankruptcy, that will also appear on your credit report. Chapter 7, or liquidation bankruptcy, will appear for ten years, while Chapter 13, or reorganization bankruptcy, will appear for seven years.

Every time you apply for a new credit card or loan, that results in a hard inquiry, or “hard pull,” on your credit report. That means a creditor will request access to your credit file to gauge your riskiness as a borrower. In contrast, a soft inquiry, or “soft pull,” happens when you or someone you authorize reviews your credit. Multiple hard inquiries can negatively impact your credit score, which is something to keep in mind if you are cash-strapped.

How Unemployment Can Indirectly Affect Your Credit

While being unemployed will not directly hurt your credit score, there are a few ways that loss of income can negatively impact it.

As we mentioned earlier, credit utilization and payment history are crucial factors in your credit score. If you need to use your credit cards more often to pay for expenses, your credit utilization will go up. The closer you get to maxing out your cards, the riskier you appear to lenders, which drives your score down. Additionally, the less income you have to draw from, the easier it becomes to miss payments. Even missing one payment can damage your score, not to mention the late payment fees and interest charges you will face.

If you are low on savings, it is natural to sustain yourself using credit to get through the tough times. While applying for a new card or loan will not impact your score much, applying for multiple cards or loans at the same time will cause your score to drop significantly as each application leads to a hard inquiry. From a lender’s perspective, searching for too many lines of new credit signals poor management.

During your unemployment period, your credit score might dip due to the trickle-down effects. But, keep in mind that this is only temporary. Once you find a new source of income, you can build your credit back up.

Getting Approved for Credit Without a Job

Lack of employment will not outright disqualify you from getting new credit but, if you do not have a steady income, that will make it harder for you to get approved for new credit cards or loans. Most places will not ask about your employment status, but they will attempt to confirm that you have a steady income and a history of on-time repayments. This process is in place so they can accurately assess your ability to repay loans or credit.

Note that different banks and creditors may have various policies in place to evaluate your creditworthiness. For example, when I applied for my Chase Freedom Flex Card, the bank requested proof of employment, including my paystubs and offer letter. If you cannot provide this information, this can hurt your chances of qualifying for bigger loans, such as a home mortgage, even if you were pre-approved.

Before applying for new credit, take a closer look at your financial situation and consider the alternatives. If you cannot afford to pay your bills, it may not be wise to take on high-interest credit or apply for a mortgage. If money is tight, go through your current expenses and find areas where you can cut back on spending.

Protecting Your Credit

Though your financial well-being may take a hit, there are a few measures you can take to protect your credit in the meantime. If you are eligible, file for unemployment benefits as soon as possible. While state unemployment offices are known for being notoriously difficult to work with, do not wait to file your claim. The longer you want, the direr your financial situation may become.

Ideally, you should already have an emergency fund set up with at least 3 to 6 months worth of expenses available. However, if you do not, you have a few options. You can either cut down on your monthly spending, ask for a favor from people you trust, or look for temporary work.

If you are at risk of missing a payment or are in a lot of debt, reach out to your creditors to negotiate. Most of the time, they will work with you to ensure that you do not default. For example, your insurance agent may lower your rates temporarily. Your auto or mortgage servicers may approve your application for forbearance.

Lastly, make sure to keep all your credit cards open and avoid taking on new credit unless necessary. When you close a credit card in good standing, that has several effects on your credit score. For starters, you cut your overall credit limit, which increases your credit utilization if your spending stays the same or goes up. Additionally, it lowers the average age of your accounts, particularly if you have had the card for a long time, which is then factored back into your credit score.

Consider Your Options

Regardless of your employment status, you should always be aware of your financial health. Here’s a few steps you can take to stay ahead.

Check Your Credit Score

Always keep an eye on your credit score. You can request free credit reports from these three credit bureaus Equifax, Experian, or TransUnion at annualcreditreport.com. When you review your credit report, check all the information and confirm that they are accurate.

Make On-Time Payments

Make sure you do not miss any payments. If you are recently unemployed, you may need to rely on credit cards more heavily to pay all your bills. While collecting unemployment can help tide you over, it may not be enough. If you are coming short, tap into alternatives, such as drawing from an emergency fund or taxable investment account.

Look For Promotional Deals

Some credit cards offer 0% promotional APR periods for existing and new users. Though lenders may be more reluctant to give you new credit if you do not have any income, you can check with existing creditors to see if they have any promotional deals. You can also look into credit cards that offer an introductory APR period when you transfer a balance over.

Create a Budget

While I do not have a strict budget, I track where every dollar of my income goes in a custom spreadsheet. That includes all my savings, investments, and expenses. For each month, I have a general idea of how much I want to spend and how much I will set aside to invest. At the end of each month, I review all my expenses and identify areas where I am overspending. 

Look into your budget and identify areas where you can cut back. Differentiate between your needs and wants. During this time, you need to keep spending low.

The Bottom Line

Losing your job can be challenging, especially if you did not see it coming or were not prepared to handle it. But, remember that this is all temporary, and you will eventually recover. In the meantime, stay proactive and seek ways to protect yourself, including filing for unemployment.

We are not financial advisors. The content on this website and our YouTube videos are for educational purposes only and merely cite our own personal opinions. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!

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