Does Filing for Unemployment Affect My Credit Score?

When you lose your job, it can be stressful for many reasons. You may need to figure out if you’re eligible for unemployment and how to file for this financial benefit while you search for new work. If you have emergency savings, you’ll also need to ration those funds so they last as long as possible.

Yet there’s another important detail that may be concerning when you find yourself suddenly out of work—your credit score. Specifically, you may wonder if unemployment causes credit score damage.

The good news is that filing for unemployment does not have a direct impact on your credit score. Your employment status won’t have a direct impact on your credit score either. But a job loss can trigger indirect problems that may affect your credit score in a negative way.

The guide below will help you learn what you need to know about unemployment and your credit score. You’ll also discover how to protect your credit when you’re unemployed and how a job loss may impact you when you apply for financing.

Does unemployment appear on your credit report?

Your credit reports are filled with sensitive financial information. But that doesn’t mean that all of your personal details automatically appear on your credit reports. There are limits when it comes to the types of data the credit bureaus include in consumer reports, and employment information is a prime example.

Consumer credit reports don’t contain information about your employment status. That means your credit report doesn’t indicate whether you’re currently unemployed, employed, or retired. The act of filing for unemployment also won’t appear on your credit report either. Nor is this information a public record.^[1]

Credit reports also do not include other key pieces of financial information, such as:

• Income details (including child support and alimony payments)
• Bank account balances
• Other types of government financial benefits (e.g., Social Security, disability, food stamps, etc.)^[2]

It is true, however, that your credit reports might contain the names of current or past employers. But that information only shows up on a credit report from Equifax, TransUnion, or Experian if you provide employment details on a credit application. In this situation, a creditor might share those details with a credit bureau, and the data may later appear on your credit report. However, the names of employers don’t impact your credit scores.^[3]

How unemployment can impact your credit score

When you sign up to receive unemployment benefits, that action doesn’t appear on your credit reports. Neither does losing your job. As a result, unemployment has no direct impact on your credit score.

Credit scoring models like FICO® and VantageScore® only consider the information listed on your credit report when calculating your credit score. Since unemployment (and employment status in general) isn’t present on your credit report, the data simply isn’t a credit score factor.

Yet it would be naive to pretend that job loss doesn’t have the potential to hurt your credit in several indirect ways. Unemployment could trigger ripple effects that may lead to financial problems, difficulty paying bills, and credit score damage.

Below are four possible ways that unemployment may impact your credit.

1. Late payments

It’s no surprise that a job loss could make it more difficult to remain current on your bills and credit obligations. Even if you qualify for unemployment benefits after a layoff, that money will probably only replace part of your lost earnings. According to the Economic Policy Institute, average unemployment benefits cover only around 40% of a person’s former wages.

Unless you have an adequate emergency fund, there’s a good chance you may fall behind on your bills if you’re unable to find a new job quickly. And if you default on your debts without bringing them current again, you might wind up with collection accounts on your credit report. Unfortunately, both late payments and collections accounts could cause serious credit score damage.

Payment history accounts for 35% of your FICO® Score and around 40% of your VantageScore credit score.^{[4] [5]} Late payments and collection accounts can also remain on your credit for up to seven years.^[6] On the bright side, any negative effects that late payments or collection accounts may have on your credit score should lessen over time.

2. Increased credit utilization

When you’re in a financial bind thanks to a job loss, it’s common to rely on credit cards to make ends meet. But there are often negative consequences to using credit cards without a plan to pay back your debt right away—including possible credit score damage.

Both FICO and VantageScore credit scoring models consider credit utilization when calculating your credit score. Credit utilization describes the relationship between your credit card limits and balances. When you use a larger percentage of your credit card limits, your credit risk increases and your credit score may decline in response.^[7]

In addition to possible credit score damage, rolling a balance over on your credit cards from month to month can be expensive. But if you make a habit of paying off your full statement balance each month, you can use your credit card account without needing to worry about pricey interest charges.

3. New credit inquiries

If you exhaust your savings and max out your current credit cards, you might feel financial pressure to apply for new credit cards or loans to cover expenses while you search for new employment. In general, it’s best to avoid new debt until you find a new job. But if you decide to go the route of borrowing additional money to try to make ends meet, it’s important to understand how doing so may impact your credit score.

When you apply for a new credit card or loan, a lender will check your credit report as part of the application process. This credit check is known as a hard credit inquiry.

Hard credit inquiries can remain on your credit report for up to 24 months. They may also impact your credit score in a negative way (though usually only slightly) for up to 12 months. The actual credit score impact of a hard credit inquiry can vary from person to person. But most people only experience a FICO Score drop of five points or less when one additional credit inquiry shows up on their credit report.^[8]

4. Length of credit history

Another way that job loss may affect your credit score in an indirect way is through changes to your length of credit history. Building off the scenario above, let’s imagine that you decide to open a new credit card or loan while you’re unemployed. Doing so would cause your average age of credit to decline and it could also adjust the age of the newest account on your credit report. Both of these details are factors that credit scoring models like FICO consider when calculating your credit score.

For example, 15% of your FICO Score comes from the length of your credit history. And as a rule, an older credit history tends to have a positive impact on your credit score.^[9]

How to protect your credit while unemployed

Trying to protect your credit while unemployed can feel like an uphill battle. But it’s important to do your best and remember while still remembering to give yourself grace. The following tips may help you navigate this time of financial stress until you’re able to find new employment.

• Consider applying for unemployment benefits (if eligible): Depending on the situation, you may be eligible for unemployment benefits through your state that provide temporary financial relief when you lose your job. Unemployment benefits could help you cover bills and stretch any savings you have while you search for new employment.
• Update your budget: Cutting spending is essential when you’re newly unemployed. It takes the average person around three to six months to find a new job according to FlexJobs.^[10] So, consider reviewing each category in your budget and look for potential ways to reduce expenses while you’re in between jobs.
• Consider working a side gig: On top of spending cuts, you may want to look for creative ways to supplement your income while you’re between jobs. Depending on your state, working part-time or side jobs while receiving unemployment benefits may be perfectly fine. Just be sure to first check your state requirements and then report any earnings you receive to your state’s unemployment office each time you file your claim.^[11]
• Take advantage of other financial resources (if needed): If you’re struggling to cover costs while out of work, certain programs may be able to help you and your family. Federal and state programs offer financial assistance with essential needs such as housing, food, and utilities. (Learn more at USA.gov/financial-hardship.) You may also be eligible for childcare assistance resources through your state. (Visit ChildCare.gov for more information.) Finally, there are local charitable and religious organizations that might offer additional resources including financial aid, food pantries, temporary transportation, and other types of aid to eligible individuals and families. (FindHelp.org can be a useful platform for anyone trying to locate free or low-cost local resources.)
• Maintain minimum payments: In general, it’s unwise to make only the minimum payments on credit cards. But if you’re trying to protect your credit score from late payments and potential damage, keeping up with at least the minimum amount due on your account each month might be an acceptable short-term strategy. (Note: If you can afford to pay off the full statement balance or some larger portion of your credit card debt, that’s typically a better solution.)
• Consider debt consolidation: If you owe a sizable amount of high-interest debt—especially outstanding credit card balances—debt consolidation might be worth considering. Debt consolidation has the potential to make managing your accounts easier and more affordable. But it could be tricky to qualify for a debt consolidation loan or balance transfer credit card while unemployed. And to be eligible for competitive interest rates and borrowing terms, you’ll typically need good credit.
• Communicate with creditors: If you feel like you might struggle to keep up with debt and bill payments while unemployed, reach out to your creditors. Some lenders might offer temporary hardship programs to pause payments or move payments to the end of your loan. Hardship programs could potentially protect your credit score from damage for a short period of time, if available.

Applying for credit while unemployed

Losing your job or applying for unemployment benefits may not have a direct effect on your credit score. Yet when you’re not working, it can often make it harder to qualify for certain types of credit.

When you fill out an application for a personal loan or credit card, a lender will often ask you questions to determine whether approving you for financing is a good investment. And on many financing applications, you’ll need to provide answers about your income.

Lenders and credit card issuers usually want proof that you have some type of steady income before approving you for new credit. But if you can show you have other ways to repay debt, you might still have a chance of qualifying for a new loan or credit card even while unemployed.

In addition to full-time employment, other possible income sources might include:

• Unemployment benefits
• Social security benefits
• Disability benefits
• Child support or alimony payments
• Spouse or domestic partner’s income
• Retirement or pension benefits
• Rental income
• Foster care or adoption subsidies
• Recurring interest payments
• Royalties^[12]

In general, it’s better to avoid going further into debt when you’re unemployed. But if you decide to apply for financing while unemployed, the strategies below might put you in a better position.

• Consider a secured loan: One way to reduce a lender’s risk is to put up some type of collateral to back your loan. For example, you could consider using a car as collateral or applying for home equity financing. But keep in mind that a secured loan is more risky for you as a borrower. If you can’t afford to repay the money you borrowed as promised, you risk losing the asset you pledged to secure the financing.
• Include household income on application (if eligible): With credit cards, you may be able to submit your household income on an application if you have a reasonable expectation of access to those funds.^[13] For example, this approach might work for spouses where one person is unemployed but the other is still working. Just make sure to be honest about the total amount of income you include on your application.
• Apply with a co-signer: Taking out a loan with a co-signer who is employed might also be helpful when you’re trying to borrow money while jobless. Just keep in mind that your friend or family member who co-signs will be taking on considerable risk in this situation. Co-signers put their personal credit ratings at risk and they may face future borrowing limitations as well due to the increased indebtedness that appears on their credit reports.
• Build credit: Remember that your income isn’t the only factor lenders and credit card issuers consider when you apply to borrow money. Your credit score also plays a key role in your eligibility for new financing. So, it’s in your best interest to build your credit in advance. That way if and when you need to rely on your credit rating in the future, you’ll be ready.

For your own sake, remember to shop around and compare financing options from multiple lenders or credit card issuers before you finalize any credit card or loan application. You always want to make sure you find the best financing deal available for your situation. It’s also important to review your budget and confirm that you can afford any new monthly payments—especially while unemployed.

Bottom line

Unemployment is challenging and more common than many people realize—especially when unemployment rates rise and layoffs increase. The good news is that while being unemployed may impact your finances, it doesn’t automatically affect your credit scores since employment status doesn’t appear on credit reports.

Still, it’s important to be aware that job loss can have an indirect impact on your credit scores. If unemployment leads to missed payments, higher credit card utilization, or frequent applications for new credit, your credit scores might decline. So, be aware of these risks and take steps to try to protect your credit from potential damage.

If you want to keep your credit safe during unemployment, focus first on careful budgeting strategies. You can also consider working side gigs and apply for additional benefits and financial assistance (if eligible) while you search for a new job. These strategies could help you stretch any savings you have and help you stay current on at least your minimum debt payments for as long as possible.

Sources

1. Experian.com. “Does Being Unemployed Hurt Your Credit Scores?” https://www.experian.com/blogs/ask-experian/does-being-unemployed-hurt-your-credit-scores/
2. Experian.com. “How Does SSI or SSDI Affect My Credit?” https://www.experian.com/blogs/ask-experian/how-does-ssi-ssdi-affect-my-credit/
3. TransUnion.com. “Does Unemployment Affect My Credit?” https://www.transunion.com/blog/financial-hardship/does-unemployment-affect-my-credit?atvy=%7B%22264995%22%3A%22Experience+B%22%7D
4. myFICO.com. “What Is Payment History?” https://www.myfico.com/credit-education/credit-scores/payment-history
5. VantageScore.com. “The Complete Guide to Your VantageScore.” https://www.vantagescore.com/resources/knowledge-center/the-complete-guide-to-your-vantagescore
6. Equifax.com. “Can You Remove Late Payments From Your Credit Reports?” https://www.equifax.com/personal/education/credit/report/articles/-/learn/remove-late-payments-credit-report/#:~:text=A%20late%20payment%20will%20be,credit%20reports%20after%20seven%20years
7. myFICO.com. “What Should My Credit Utilization Ratio Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be
8. myFICO.com. “What Are Credit Inquiries and How Do They Affect Your FICO® Score?” https://www.myfico.com/credit-education/credit-reports/credit-checks-and-inquiries
9. myFICO.com. “What Is the Length of Your Credit History?” https://www.myfico.com/credit-education/credit-scores/length-of-credit-history
10. FlexJobs.com. “How Long Should a Job Search Take?” https://www.flexjobs.com/blog/post/how-long-does-it-take-to-find-a-job#
11. DEW.SC.gov. “How Unemployment Insurance Works.” https://www.dew.sc.gov/individuals/how-unemployment-insurance-works#:~:text=Working%20part%2Dtime%20or%20odd,when%20filing%20your%20weekly%20claim
12. Credible.com. “How to Get a Personal Loan If You’re Unemployed.” https://www.credible.com/personal-loan/loans-for-unemployed
13. ConsumerFinance.gov. “Ability to Pay.” https://www.consumerfinance.gov/rules-policy/regulations/1026/interp-51/#51-a-1-i-Interp-2

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

Editorial policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).