A job loss is hard on your financial health, and it can be hard on your credit. High credit card balances may ding your scores and missed payments caused by unemployment might haunt your credit report for years. However, there are steps you can take to prevent the damage.
Losing a job is an incredibly stressful experience that often makes a person consider lifestyle changes and rework their budget.
Unfortunately, it can happen to anybody, and often you might not feel prepared, having more questions than answers.
One of the forms of financial relief people use in such circumstances is unemployment insurance. For instance, due to the consequences of the COVID-19 outbreak, over 25 million Americans had filed for unemployment as of late April, according to data from the Department of Labor.
While collecting unemployment can be essential to make it through a crisis, you might be wondering how it will impact your financial well-being. For example, does filing for unemployment affect your credit?
Read on to learn how an unemployment claim can hurt your credit – and what you can do about it.
Unemployment and your credit: What you need to know
Does unemployment show on your credit report?
The good news is, collecting unemployment isn’t reflected on your credit report. According to Experian, one of the major credit bureaus, the fact that you are unemployed will not become part of your credit history, nor will filing for unemployment.
The information you’ll find on your credit report includes personal information, records of your accounts and credit inquiries, as well as public records. While it may have your current or past employers listed in the personal information section, it’s not intended to serve as your full employment history. This section simply lists employers you’ve put on your credit applications.
Unemployment benefits are also not considered public record and won’t show in this section of your credit report. In fact, the only type of public record that can be included in it is bankruptcy.
Andy Mardock, certified financial planner and president of ViviFi Planning, also notes that credit reports don’t reflect income information.
“A decrease in income,” he explains, “which could come from accepting a new job at a lower salary after a layoff or a reduction in salary, commissions or bonus from your current employer – does not appear on a credit report.”
How unemployment can hurt your credit
Unemployment can affect your credit even without showing on your credit report.
“This is a trickle-down effect of unemployment,” Mardock explains. “While unemployment can’t directly hurt your credit score, the higher chance of missed payments and more credit utilization often does. Additionally, lost income usually means drawing on savings to get by.”
If you have savings or an emergency fund, you can use these funds to sustain yourself during a challenging time. But if your savings are low, it’s natural to turn to your credit cards.
See related: Should you use a credit card as your emergency fund?
This, in turn, can increase your credit utilization ratio, or how much credit you use relative to your credit limit. If this ratio gets higher than 30%, your credit scores can take a hit, since credit utilization is the second most important credit factor.
Your payment history is the most crucial factor in your credit. In a financial pinch, many people find they can’t afford their loan or credit card payments anymore. However, if you simply stop paying, missed payments will stay on your credit report for seven years – significantly hurting your scores. The longer the delinquency lasts, the greater its impact on your credit.
Charge-offs and delinquencies are serious derogatory marks on a credit report. It might take years to rebuild credit after such missteps, so it’s best to avoid them in the first place.
Danielle Seurkamp, certified financial planner and the founder of Well Spent Wealth Planning, also notes that being unemployed is likely to inhibit your ability to refinance.
“A client has recently asked me this exact question,” she said. “But if you’ve already closed on a recent refinance, filing for unemployment won’t impact your new loan.”
How to protect your credit when unemployed
Unemployment can be hard on your financial well-being. Still, there are measures you can take to prevent it from hurting your credit.
The most important thing to do is take action. If you’ve lost your job and have no additional sources of income or savings to hold you over, it may be a good idea to file for unemployment as soon as you can. It won’t hurt your credit standing and will provide financial support while you’re looking for employment.
“If eligible, file for unemployment benefits as quickly as possible,” Mardock recommends. “State unemployment offices are overwhelmed with applications, and many are working with notoriously outdated computer systems. Some folks are waiting hours on hold to submit their claim. It’s frustrating, I know, but stick with it. You’ll very likely be better off than waiting to file.”
To avoid missed payments, try to work out alternative solutions by contacting your lenders. Most of the time, creditors are willing to work with their borrowers to prevent them from defaulting.
“If you’re unemployed and in debt right now, your knee-jerk reaction may be to hide from your creditors,” says Howard Dvorkin, certified public accountant and chairman of Debt.com. “But this can hurt your credit score, so do this instead: Be proactive and call your creditors.”
“Apply for forbearance through your auto lender so you won’t need to worry about your car getting repossessed,” Dvorkin adds, noting that it works the same way with mortgage forbearance.
Another essential step to take is creating a budget. You always need to know where your money is coming and going – especially when you lose your income. This way, you’ll be able to see any unnecessary expenses and cut them, find opportunities to save money and optimize your spending.
“Call your insurance agent or utility company to negotiate better rates,” Dvorkin suggests. “Cancel any extra cable or media packages and subscriptions. Review your phone, mobile and internet bills to make sure you’re getting the best deals. You may need to downgrade to a more affordable plan.”
Lastly, keep your credit cards open and don’t borrow unless absolutely necessary. While it might seem like a good idea to close a credit card that’s been paid off, this will cut your credit limit and increase your credit utilization. Try to keep your credit utilization low and minimize debt by concentrating on your needs, not wants.
Unemployment during COVID-19
Many credit card issuers and loan providers have stepped up to assist consumers amid the COVID-19 pandemic. Some offer deferred payments; others may lower interest or payment amounts.
Dvorkin noted the government has also taken action to help consumers’ credit scores stay afloat. For instance, some federally backed mortgages now allow homeowners to get a break on payments. Certain federal student loans have been deferred – meaning you don’t have to pay them for some time.
If you have private student loans, consider calling your loan servicers as they can offer options for deferment as well.
It’s always a good idea to contact your lender directly and ask about hardship options as they may offer you a personalized solution.
Being out of a job is challenging, especially when it forces you to take measures like filing for unemployment. While an unemployment claim won’t appear on your credit report, not having a regular income can hurt your credit. However, you can avoid the damage if you stay proactive and don’t let the debts pile up by leaving them unpaid. There’s always a solution – just make sure to contact your creditors to help you find one.