Money Health

Does Unemployment Affect Your Credit Score?

Unemployment and Credit Score
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American workers felt the pull of rising unemployment rates this past month with the U.S. Bureau of Labor Statistics reporting a 4.4% unemployment rate in March 2020. If you are one of the millions of Americans that have recently become unemployed due to coronavirus, one of the many questions you may have is how unemployment might affect your credit score. When income comes to a halt, how do you keep your credit score from crumbling?

First things first, it’s important to obtain your unemployment benefits as soon as you are notified of job loss from your employer. Your biggest concern should be about meeting your basic needs. Once you have addressed your short-term financial needs, it’s time to take a look at how the pandemic affects your finances in the long-term, including your credit score. Here are some things to consider.

Does unemployment affect my credit score?

The answer to this question is yes and no. Your credit score is based on how you interact with debt. So if you are still able to continue making payments and keep your credit utilization under 30%, you shouldn’t see a negative impact to your credit score.
Your credit score is made up of five factors:

  1. Payment history. How long you have paid your debt, if you missed payments and whether those payments were on time.
  2. Utilization. How much credit you use compared to your credit limit.
  3. Length of credit history. The length of time your credit cards, loans, and other type of credit have been open.
  4. Credit mix. Including credit cards, mortgages, student loans, car loans, etc.
  5. New credit. Number of new accounts opened at the time your score is being viewed.

If you are unable to keep these five categories in good standing during unemployment, you could see a decrease in your credit score. Your accounts are considered in good standing when you make regular, on-time payments and you make at least the minimum payment.

Does loan deferment hurt my credit score?

There are several deferment and relief programs that provide financial assistance during the coronavirus pandemic; you may want to take advantage of these programs if you are unemployed. But if you do, will a loan deferment hurt your credit score? The good news is Congress is throwing everyone a credit lifeline.

In the CARES Act, under Section 4021, Congress passed credit protection during COVID-19. If you apply for a deferment or relief program that allows you to temporarily pause payments, your lenders will not report those actions to the credit bureau. If your accounts were in good standing before coronavirus, your accounts will still be in good standing, even if you apply for loan deferment or become unemployed.

If you had any delinquent accounts before the pandemic, your accounts will still be delinquent and could continue to impact your credit score. You do have the opportunity to get your accounts current which can be reported to credit bureaus.

This amendment lasts for the duration of the pandemic plus 120 days after the national emergency ends. If you need to defer payments, you don’t have to worry about your lenders reporting this and impacting your credit score.

What if I get into more debt while I’m unemployed?

Your debt-to-income ratio (DTI) can change dramatically if you increase your debt while you are unemployed. While the CARES Act gives you some short-term credit protection, you could get yourself into deeper water if your DTI is not corrected after the amendment expires.

That means you have 120 days after the national emergency is over to clean up additional debt that you may have acquired during the pandemic. To help you manage, think of your debts this way: Additional debt should be categorized into high and low priorities. High priority debts, such as mortgage payments, car loans, and credit cards should be addressed first. You’ll have more flexibility with student loans and you don’t run the risk of eviction or repossession with student loans.

3 ways to cope with unemployment

Losing a job can be frightening, but there are a few ways to stand on more solid financial ground while you are unemployed, even if that means you have to make a few temporary sacrifices.

Step 1: Cover the basics first

Determine the amount of cash you have on hand by looking at your checking and savings accounts. This money needs to be used to cover your basic living needs. This includes rent or mortgage payment, utilities, cell phone, internet, car-related expenses such as gas and car insurance, and food.

Step 2: Pause all unnecessary spending

Unnecessary spending is anything outside of your basic living expenses. That includes online shopping, ordering takeout meals, clothes, décor and subscriptions. Now is the time to check what automated subscriptions you have and if you can temporarily pause or cancel them. You need to reduce expenses as much as possible to take care of your basic living needs.

Step 3: Apply for deferment programs

If you are still waiting for unemployment benefits to kick in, you may want to apply for deferment or relief programs. Federal student loan payments and interest are waived until September 30. Banks and financial lenders have other assistance programs in place, too. Just make sure you understand how interest accrues during deferment and if you are responsible for the deferred amount immediately after deferment.

Learn more about managing debt

If unemployment has caused you to struggle with debt, a first step might be to learn more about your options for managing debt and money. We have developed a simple to follow guide to help you find the tools you need to move to a better financial future. Get started by downloading our free guide right now.

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Justine Nelson is the founder of Debt Free Millennials, an online community to help millennials eliminate debt and live a debt free lifestyle. As a freelance writer and YouTuber, Justine enjoys creating upbeat and educational personal finance content. This Midwest millennial paid off $35k in student loan debt and now resides in San Diego with her husband.