Losing your job is a tumultuous experience that can seriously impact your everyday life. Coping with the loss of income and change in lifestyle can be extremely difficult. While you scramble to figure out your next steps, you may deal with high levels of stress and uncertainty.
In particular, you may be worried about the financial impact unemployment can have on you and your credit. But you can rest assured that while unemployment may impact your income, it has no direct impact on your credit score.
Credit bureaus and lenders cannot see if your income has changed or if you have filed for unemployment without your permission. With a well thought out plan, you can get through this temporary setback with your credit unscathed. We’ll go over the impacts unemployment may have on your credit and tips to protect your credit as you find your next endeavor.
- Your credit score affects many facets of your life, from qualifying for loans to insurance premiums to job applications.
- While your credit report provides an overview of your financial profile, it doesn’t include everything. We’ll outline what does and does not get recorded on your credit report.
- Unemployment does not directly impact your credit, but there are ways it can indirectly hurt your credit if you don’t manage your finances wisely.
Why Your Credit Score Matters
Your credit score is one of the most crucial factors in your financial life. A good credit score can save you money on interest rates and help you qualify for better financial products. On the other hand, a bad credit score can make it challenging to get approved for a loan or a mortgage and can even lead to higher insurance premiums.
Lenders use your credit score to determine your creditworthiness and risk as a borrower. If you have a high credit score, lenders will see you as less risky and may offer you lower interest rates and better terms. But, if you have a low credit score, lenders may be hesitant to lend to you at all. Or, they may charge higher interest rates to offset their risk. In addition, insurers often use credit scores when setting premiums, so having a good score could lead to your policy costing less than it would otherwise.
Your goal should be to build and maintain a strong credit score because it can save you money in the long run. By making smart financial decisions and paying your bills on time, you can improve your credit score over time and reap the benefits.
Unemployment Will Not Appear on Your Credit Report
While your credit report contains information about your financial situation, it doesn’t include every detail. Unemployment is not considered an account like other loans or lines of credit, nor is it reported to the credit bureaus by employers.
An employer’s name would only show up in your reports if you listed them while applying for credit in the past. When lenders submit records of your loan applications to the credit bureaus, that employment information gets recorded and saved. However, it will not include how long you’ve worked at each company, positions held, or your income.
Unless you explicitly give the credit bureaus and lenders permission to see that you’ve filed for unemployment, they will not be able to access that information. That usually only happens if your credit card issuer notices unusual behavior from you, such as a significant uptick in spending or missing payments.
When this happens, your card issuer may request a financial review of your account. You will get asked questions about your employment status and spending. Typically, you will have up to 14 days to respond and present the requested documents, which may include bank statements that prove you have a steady income stream.
Breaking Down What Does and Doesn’t Appear on Your Credit Reports
Understanding what type of information your credit report contains may help alleviate some of the stress you may be dealing with during these uncertain times. Here’s what you can expect to see in your credit report:
- Identifying data, including your name, current and former addresses, Social Security number, employment history (that you included in previous applications), and phone numbers
- Records of your loans and credit card accounts, including the dates that they were opened (and closed), the associated creditors, account standings, and previous credit applications
- Records of your payment history on all your accounts, including any late and/or missed payments
- Public records related to your debt, including bankruptcies, foreclosures, and repossessions
Here’s what’s not included in your report:
- Current employment status
- Income level
- Bank account balances or other assets
- Marital status
- Applications for unemployment benefits or government assistance
Filing For Unemployment Isn’t Bad For Credit
There are no public records that track who collects unemployment benefits, nor is this income included in your credit report. In other words, it will not directly affect your credit score. Unemployment agencies are not allowed to share your history except in rare circumstances.
In the meantime, applying for and receiving unemployment benefits may help you cover essential expenses and the minimum payments on existing debt. We recommend trying your best to make the minimum payment on your credit card balances at the very least to keep your credit intact while you figure out your next moves.
But, Unemployment Can Affect Your Credit Scores Indirectly
Being unemployed does not affect your credit directly, but unemployment can have a trickle-down effect on your credit through indirect means.
Higher Credit Utilization
If you start using your credit cards significantly more to cover your expenses while unemployed, that can increase your credit utilization and signal to lenders that you are a higher-risk borrower. Your credit utilization ratio is the amount of your total available credit across all the accounts you are using and is one of the most significant factors in your credit score calculations.
Financial experts recommend keeping your credit utilization rate below 30%, though I like to keep mine below 10% to 15% to be safe. If you are using more of your available credit than usual, that can cause your credit score to go down and make it harder to get approved for new loans or lines of credit in the future.
Additionally, having a high balance on your credit cards can increase the interest you accrue each month, making it more troublesome to pay off if you don’t have a steady income. While being unemployed is challenging enough without worrying about your credit score, not managing your finances tightly could further complicate things down the road.
Late or Missed Payments
If you lose your job, you may struggle to make ends meet due to the reduced income, especially if your budget does not have a lot of wiggle room. That means you may start missing payments on your bills, which could eventually lead to defaulting on your loans.
Late payments can then lead to collections activity and a lower credit score. Since payment history is a major factor in your credit score, missing even one payment could cause your score to drop significantly. Even if you’re able to find another job quickly, the damage to your credit may take time to repair.
During periods where I had no income, I significantly cut down on expenses, such as dining out and shopping and lowered my investment contributions. It also helped to have an emergency fund set aside. Most financial experts recommend having 3 to 6 months of expenses for emergencies, but I like to have at least 6 to 8 months worth of expenses in a high-yield savings account like Marcus by Goldman Sachs.
Applying For Credit Cards While Unemployed
Nothing is stopping you from applying for new credit while unemployed, but getting approved may be challenging. Many lenders require borrowers to have a steady income to qualify for a loan, though they are less concerned with your income sources. They will likely require proof of unemployment benefits, savings, or other forms of income. Be prepared to provide documentation of your financial situation and why you need the loan.
Lenders will also check your credit to confirm you have a history of positive repayments. If you’ve missed any payments since you became unemployed, your credit score may have taken a hit, which hurts your chances of getting approved for the loan.
Be sure to shop around for loans when you are unemployed and compare the interest rates, fees, and repayment terms. Many different lenders offer loans specifically designed for people without a regular income source.
Before applying for new credit, do the math to ensure you can cover the additional monthly payments. Without a reliable source of income, it may be harder than usual to repay debt. Alternatively, consider making a budget and cutting back on unnecessary expenses wherever possible.
Protecting Your Credit Score While Unemployed
While unemployment can have a significant impact on your credit, there are things you can do to mitigate the damage and maintain your credit.
- Try to keep up with your payments even after you’ve lost your job. That will show creditors that you’re still committed to paying off your debts during tough times.
- Contact your creditors as soon as possible and explain your situation. Many lenders are willing to work with borrowers experiencing financial hardship and may offer financial assistance programs.
- Check your credit regularly to understand what’s happening with your credit. You can get free copies of your credit reports from each of the three main bureaus (Experian, TransUnion, and Equifax) at AnnualCreditReport.com.
- If you have high-interest debt, apply for a 0% APR credit card and transfer your existing balance to that card. That can help lower your interest payments temporarily and give you more time to pay off your debt.
The Bottom Line
Going through a job loss is a significant life event and can be very scary, but that doesn’t mean you can’t recover and come out stronger than before. As long as you maintain good financial habits, your credit should not get heavily impacted. Remember that your credit report does not list income nor the balances of your bank accounts.
In the meantime, focus on things you can control, such as keeping your spending low, monitoring your credit, and looking for your next opportunity. Who knows — maybe unemployment presents an opportunity for redirection and to put yourself on the path toward a better, brighter future.