Does Unemployment Affect Your Credit Score?

Unemployment won't directly affect your credit score. Your credit score is a reflection of your history with credit accounts, not your situation. So losing your job won't impact your credit score. But if your financial behavior changes because of job loss, that's a different story. For example, your score may drop if you miss payments or lean too heavily on your credit card. 

It’s natural to be concerned about immediate practical matters if you lose your job. From paying your bills to qualifying for unemployment benefits and getting a new job, there's a lot to think about. The good news is that you can cross your credit score off your worries. 

In this article, we'll explain how to protect your credit when you’re between jobs.

What Affects Your Credit Score?

The credit bureaus—organizations that calculate your credit score—don't look at your employment status, earnings, or wealth.

Here are some of the factors the credit bureaus use to calculate your credit score:

• Your current debts

• Your payment history 

• The amount of your available credit you use

• The age of your accounts

• The type and number of accounts you have

• Whether you’ve applied for new credit recently

• Collections, foreclosures, debt settlement, bankruptcies, or other significant negative events

You May Like These

Is a Credit Card Secured or Unsecured Debt?

Does Paying Off Your Credit Cards Help Your Credit Score

What Happens To Unpaid Credit Card Debt After 7 Years

How Being Unemployed Can Affect Your Credit Score

Being unemployed could affect your credit score if it changes your financial behavior. For example, money can be tight after a job loss, so you might lean more heavily on your credit card or miss bill payments. Both of these can affect your credit score. 

Here are some of the indirect ways that unemployment can harm your credit.

Late payments

Payment history has a big influence on your credit score. Living on unemployment income could leave you short on cash and unable to pay all of your bills on time. If you're 30 days or more late with a payment, it can hurt your score. The later your payments are, the more they hurt. 

Using your credit cards more

Unemployment usually means there's less money coming in. In that scenario, you may use your credit card more to cover basic needs. It’s understandable, but high credit card balances can impact your credit score. That's because the balance on your credit cards affects your credit utilization ratio. That's your credit card balance compared to your credit limit. It’s calculated for each card and overall.

Lenders view high credit utilization as a sign you may be over-extended. So as your credit card balances go up, your credit score will tend to go down. 

Inquiries

You may decide to apply for a new credit card or loan to tide you over financially while you’re unemployed. Depending on your financial situation, that may make sense. But any time you apply for credit, your score could temporarily go down. Multiple credit applications could send a signal that your finances are unstable. 

How to Make Sure Unemployment Doesn’t Affect Your Credit Score

Knowing the indirect ways that unemployment can impact your credit could help you protect your score. The key is to closely manage your finances as you shift into unemployment mode. 

Here are some steps you can take.

Bolt down your budget

Now may be a good time to sit down and review your spending. Take a look at where your money goes, starting with the essentials like keeping a roof over your head and food on the table. Factor in income sources such as unemployment benefits or other assistance. 

If you don't want your unemployment to impact your credit score, it’s essential you stay on top of bill payments. To do this, rejig your budget to make your money stretch as far as possible.

• Cut unnecessary spending. If your income has taken a hit, anything that’s not a necessity is a luxury. Find optional expenses that you can cancel or delay. Spend a few minutes canceling monthly subscriptions that you can live without for now.

• Try to lower your utility bills. If you've used the same cable company or internet service provider for years, you may be able to cut costs by switching plans. Contact your service providers and ask for a cheaper plan.  

• Consider debt consolidation. Debt consolidation means using a new loan to pay down your existing balances. Consolidating could make sense if you qualify for a lower interest rate compared to the rates on your current debts. 

• Lower meal costs. Use supermarket special offers, coupons, and bulk purchases to cut the costs of meals at home. If you struggle with cooking, hit those early-bird specials and kids-eat-free days. Order bigger meals and divide them in half before you eat, taking the leftovers home for another meal. 

Look for extra sources of income

There are only so many ways you can save money. If you're worried about paying bills while you aren't working, think about ways to bring in some extra cash.

• Apply for unemployment benefits. Find out whether you qualify for unemployment benefits, and how the process works in your state. It may take a few weeks (or more) before any money arrives, so the sooner you apply, the better.

• Get a temporary job or side hustle. You may not be able to land your next main job immediately. In the meantime, try to earn a few extra bucks with a temporary side job. Maybe you can drive for a delivery service or a ride-sharing app. If you’ve had an idea brewing for Etsy or DeviantArt, now’s the time to post those photos and try to get some sales.

• Sell things. If you have anything of value you might be able to sell, go for it. There are several online marketplaces where you may find eager buyers for items you no longer need. And if you recently bought some non-essentials, consider returning them. 

Communicate with creditors

If you're not able to make minimum payments, call lenders or creditors before your payment is late. The other way to avoid late payments dragging down your credit score is to talk to the people you owe. 

Explain your situation, and ask if they have any kind of hardship programs or other forms of support. These might include late payment forgiveness, forbearance plans that can temporarily halt your payments, or a payment plan that’s more affordable. 

Deal with your debt

Around two-thirds of Americans live paycheck-to-paycheck and would struggle to stay afloat if they lost their jobs. That's particularly the case for people who are already finding it hard to stay on top of their debts. 

If you have less money coming in and want to protect your credit, consider getting help from a nonprofit credit counselor. This expert can help guide you through your options now, and in case your financial situation gets worse. 

Sometimes, the loss of the primary breadwinner’s income is an extreme financial emergency that's difficult to overcome. In that case, you might want to talk to a reputable debt relief company that knows how to negotiate with creditors and deal with debt. 

Unemployment, Credit Scores, and Credit Reports

We've talked a lot about the factors that impact credit scores in this article. To fully understand the connections between unemployment and credit, it's worth going a little deeper into credit scores and credit reports, too.

Your credit score is a number between 300 and 850 that gives lenders an idea of how likely you are to repay your loans. There are different kinds of credit scores (like FICO and VantageScore), and they are all based on the information in your credit reports. Read more on how your credit score is calculated.

Unemployment isn't a factor in your credit score.

Your credit report is a document that contains your personal information, as well as details of your history with credit accounts and recent applications for credit. Your credit history also shows negative information like collection accounts, bankruptcies, and mortgage foreclosures. 

The three agencies that track and report credit information are Experian, TransUnion, and Equifax. You can get a free copy of your credit reports from each of them every week by visiting AnnualCreditReport.com. Your credit report isn't public, but certain people or organizations can access it if they have a legal reason to do so.

Your credit report could list some previous employers, but it's unlikely to show your entire work history. That's because some creditors may pass the info you give them about where you work on to the credit bureaus. Even if they do, employment details are solely informational, and have no bearing on your creditworthiness. 

Unemployment doesn't show up on your credit report.

How Credit Scores Can Impact Your Job Hunt

Potential employers won’t see your credit score, but your credit history could come into play when you apply for a job. 

It's not uncommon for potential employers to do background checks on employees. In some cases, that includes a credit report check. This happens more with financial positions, or jobs that require access to people's personal data. Importantly, employers can't access your report without your consent.

Potential employer credit checks are soft inquiries, which means they won't ding your credit score the way a new credit card application might. Plus, some states have specific rules about what information employers can access.

As you dust off your résumé and update your LinkedIn profile, it's also worth getting a copy of your credit reports to make sure there are no errors. That way, you won't get caught off-guard by any information your potential employer finds about you. 

Don't Ignore Your Bills If You're Unemployed

If you don't want job loss to impact your credit score, be proactive about managing your finances. During this time of transition, do the best you can with the things that are within your control. 

For example, prioritize essential bills, and avoid using your credit card for everyday spending. Since missed payments and high credit card balances can lower your credit score, that can help you minimize the impact of job loss on your credit score.