The loss of a job is a serious event. It affects your life and finances, and sometimes you have to file for unemployment as a result.
It’s natural to have concerns that losing a job and going on unemployment may damage your credit score, hurting your financial future.
So, does filing for unemployment affect credit? Fortunately, your employment status doesn’t directly affect your credit score. The five factors that do impact credit scores are payment history, amounts owed (amount of debt), the length of your credit history, types of credit used (credit mix), and new credit.
However, unemployment can have an indirect effect on your credit score.
Your employment status and whether you have applied for unemployment compensation do not appear on credit reports or affect credit scores.
So what information does appear on a credit report?
First is personally identifiable information (PII), such as your name, address, Social Security number, date of birth, and employment information. This personal information is used solely for identification, not to calculate FICO® scores. The data comes from what you supply to lenders when you apply for new credit.
For each account you have with a lender, the lender will report several details to the credit bureaus. Then, your credit report may include the type of account, the date it was opened, the credit limit or loan amount, the account balance, and payment history.
All of this information does go into calculating your FICO scores. Therefore, staying up-to-date and in good standing on all of your accounts is the key to a good credit score.
Credit inquiries occur when you authorize a lender to get a copy of your credit report, and some of these inquiries may also be listed on the report. There are two types of inquiries: soft and hard.
An example of a "soft" inquiry is when you check your own credit reports. Other soft inquiries include when companies extend pre-approved credit or insurance offers or when your current lenders and creditors conduct periodic reviews of your accounts.
“Hard” inquiries happen when lenders review your credit report because you applied for credit or a loan or service. Lenders can only see the "hard" inquiries on your credit report, not “soft” inquiries.
It’s important to be aware that multiple "hard" inquiries may cause your credit score to drop. Hard inquiries typically point to high-risk borrowers who may not be able to pay back their loans.
Finally, the credit bureau gathers public records information from state and county courts, including records of bankruptcies and data about any missed payment or overdue debt that was sent to collections.,
In the event you lose your job, it’s smart to take steps to protect your credit. At the top of the list is adjusting your spending habits. Try to spend within your means and do everything within your power to make on-time payments on the outstanding debts you do have.
It’s also important to manage unemployment benefits. There are several benefit and aid programs to help with unemployment insurance benefits, job training, and job finding.
Finally, keep a constant eye on your credit. Federal law requires each of the three credit bureaus — Equifax, Experian, and TransUnion — to provide a free credit report every 12 months at your request. You can also request your free credit reports at annualcreditreport.com.
When you review your credit reports, make sure that you recognize all the information they contain, including your personal information. In addition, check that the account and payment information is accurate and complete. If you find incorrect information or information you don’t think belongs to you, contact the business that issued the account or the issuing credit reporting company., (See our related article on how to read a credit report.)
Unemployment has many direct effects on one’s life that can affect finances and, in turn, negatively impact your credit report.
First, unemployment reduces available money while increasing free time. Second, unemployment can also harm health, especially your sense of well-being. Losing your job can have lasting emotional and physical effects. Those effects could further impact your ability to gain new work, restore income, and manage credit cards, which may, in turn, affect your credit score.
The psychological effects of unemployment are minimized if there are job prospects on the horizon, or if you have greater support from family, friends, and society in general.
Indirectly, job loss and unemployment can affect your personal finances via your credit utilization rate and payment history.
Credit utilization rate, also known as credit utilization ratio, divides the revolving credit you're using by the total revolving credit you have at your disposal. Simply put, it’s how much money is owed divided by your credit limit.
For example, suppose you have one credit card with a $10,000 limit, and your balance is $6,000. In that case, the formula calculates a credit utilization rate of 60%. So of your total available credit, you're using more than half.
Unemployment may cause an individual to use credit cards for everyday expenses, which can increase your credit utilization rate — negatively impacting your credit score.
Ideally, you want to have a low credit utilization rate. When it comes to credit scoring, the lower the rate, the less credit you're using. This is typically a good thing. (An exception is when your credit utilization rate is 0%, which suggests you don't use any credit.) Experian recommends keeping your credit utilization rate below 30%.
Your payment history shows how you've paid your accounts over time — both the good and the bad. Your payment history includes on-time and late payments on various accounts, including credit cards, student loan, mortgages, and auto loans. Your payment history is also evaluated based on the status, number of missed payments, and the amount owed.
Research shows that how you pay your accounts over time tends to be the strongest evidence that you’re likely to pay back your debts. A lender's number one priority is the history of whether or not you repay your debts.
If you can’t make minimum payments on your debts due to unemployment, there are a few proactive things you can do.
First, and some say most important, is to make sure you have food, utilities, shelter, and transportation. Ensure you can live.
Then, get on a budget. Find out what money you have coming in and determine where it needs to be spent.
It’s also important to get current on your bills — and stay current. How can you do that while unemployed? Take the jobs you can get. Make money on your hobbies. Sell the “stuff” you have that you don’t use or need. Most importantly, take advantage of free resources.
There are many services, nonprofits, and other local and federal resources that provide financial counseling, assistance with rent, food, mortgage payments, utility assistance, or internet programs to help you reduce your expenses as much as possible while you look for a new job.
Of course, you must give your creditors their fair share as a borrower. Simply put, after you’ve paid for your essentials, give each creditor their fair share of the money you have left. And as soon as you realize you won’t be able to keep up with payments on your credit card balance, immediately contact the credit card issuer and make arrangements.
Usually, issuers have credit hardship programs or offer an emergency forbearance option. This allows you to, over a set time, reduce or skip payments through deferment. Alternatively, your creditors might waive fees or reduce your interest rate for a time.
However, if you can’t keep up with all of the payments, prioritize paying the minimum amount on the cards with the highest balances. These balances, if not paid, are likely to have the greatest negative effect on your credit score.
While filing for unemployment doesn't appear on a credit report or affect your credit score, it can hurt many financial aspects of your life.
The likelihood of making low payments or even nonpayment on your accounts increases as unemployment continues. You’re also more likely to use credit cards to try to make ends meet (or even to improve your mood as unemployment continues). Both of these outcomes can damage your credit score.
During your time of unemployment, keep a watchful eye on your credit, correcting any errors. Take care of the essentials and pay your bills by negotiating reduced payments, consolidating debt, or even taking odd jobs and selling things you don't need.
You can emerge from unemployment with a good credit report if you take action to maintain your credit score.
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