How Unemployment Affects Your Credit Score

woman stressed about unemployment and her credit score

If you just lost your job, you may be concerned if unemployment affects your credit score. No doubt, your job provides crucial income for you and your family. If you are laid off or fired, your paychecks suddenly stop and your money is limited. This is extremely stressful if you struggle to maintain payments for household and personal bills. Job loss is a huge adjustment but it is comforting to know that it does not directly affect your credit score. But you do need to take action to protect it. We can show you how to maintain your good credit.

What Influences Credit

Here’s a quick outline of the elements that make up your credit score calculation. Remember, your credit score is the 3-digt number that is formulated based on your financial behavior, specifically money you borrow and payback. Knowing more about your credit score empowers you as you take action in paying your bills each month. It will ensure your unemployment affects your credit score in a neutral manner – you’ll maintain your score.

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

The Trickle Effect – How Unemployment Affects Credit Scores

While losing your job by itself does nothing to your credit score directly, the loss of income can cause trouble. Over time, you may fall behind on making payments. If you miss a credit card payment past 30 days, your credit score will fall. You may miss utility bills or worse yet, your mortgage.

Your payment history makes up for 35% of the calculation of your credit score. Missing one credit card payment can make your score drop as much as 100 points. Another way your job loss can negatively affect your credit score is if you take out a new loan or overextend your debt. Racking up money owed on your credit cards or taking out new loans to float you is risky. Remember, credit utilization makes up 30% of your credit score.

Make  A Plan

Not to worry! The first step when you lose your job is to sit down and make a plan. This means setting a goal of getting your next job and also making a financial strategy.

When you lose your job, it is wise to review your budget and take an inventory of all your expenses. Include your car payments, utility bills, credit cards, mortgages, and anything else. 

  1. Opt-out of any unnecessary expense that you possibly can avoid – even if you think you are alright initially. Scrutinize at your subscriptions and memberships. It’s better to not overextend yourself. Ultimately, you want to avoid any negative impact on your credit score health. 
  2. Figure out any income sources you do have. Every source of income, no matter how small, can help. Consider emergency savings, severance packages, unemployment benefits, Social Security, and a family member’s income. Consider creative ways to make money if needed by selling items that you own.
  3. Know your credit score. It is always wise to know where you stand. Check your credit report or use a credit monitoring app.
  4. Contact your creditors. If you anticipate problems paying your bills, it’s best to contact your lenders. They may be willing to work with you until you get your next job.

Hopefully, with a budget in place, removing things that aren’t life essentials, and using all sources of income or savings, you will be able to make minimum payments on your credit cards and loans. While not ideal, it is crucial to your credit score that you do not miss a payment.

Ways to Prioritize Payments

If after you’ve scrutinized your budget and expenses and you still are unable to pay all of your bills, you’ll need to prioritize your payments.

  1. The first priority in making payments are any secured loans you have, such as car loans and mortgages. You can lose your car and home if you miss payments so these are the ones you’ll want to make sure you pay. 
  2. Second, aside from your secured loans, you’ll want to prioritize making minimum payments to your credit cards. Missing a credit card payment does ding your credit score.

Your Credit Score for Your Job Search

While somewhat of a catch-22, you need good credit sometimes to get a new job, yet you need the job in order to maintain good credit health. If you have an unsteady credit history, it could prevent you from getting a potential job. While not every employer, some do check credit as part of their screening process. This is why you need to do all you can to make your payments on time.

Final Word

No matter what the circumstance, it is worrisome to be out of work and wonder how you will pay your bills. It is assuring to know how unemployment affects your credit score. Losing your job does create difficulties in your personal finances. Remember though that unemployment does not mean your credit is doomed. Begin planning and taking action right away. By using our tips, your score can be maintained while you land your next gig.