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Employment

Does Being Unemployed Hurt Your Credit Scores?

Losing your job can seriously impact your everyday life, especially if it happens abruptly. From the loss of income, to the shift in daily life while you find a new job, unemployment can put your life on hold and cause stress along the way.

You may be fearful of the financial impact unemployment can have, and worry losing your job will damage your credit. But rest assured: While unemployment may impact your income, employment status isn't a factor in your credit. With the right preparation, it's possible to maintain your scores while out of work.

Read on to see how being unemployed could indirectly affect your credit score and for tips on what you can do to protect your credit if you've lost your job.

Is Unemployment Listed on My Credit Report?

While you may see your current or past employer listed in your credit reports, your files do not record any periods of unemployment. The only reason an employer would show in your reports is if you listed who you worked for on a previous application for credit. When creditors submit records of loan applications to credit bureaus, that employment information is recorded and saved in your file, but is not used to calculate your scores.

Credit scores are based on the data compiled in your credit reports by the three main credit bureaus (Experian, TransUnion and Equifax). Your creditors, and anyone you've applied for credit with, report this data to the bureaus, and scoring systems such as FICO use it to generate a three-digit credit score.

Your credit reports show how you've managed borrowing and repaying money in the past. Information in your report includes:

  • Records of loans and credit card accounts you've opened. This includes the dates they were opened (and closed, if applicable) and the creditor the account is with. Credit reports also contain information about credit applications (inquiries), whether you were approved or not.
  • A record of your payment history on your accounts, including late and missed payments. This information shows how reliably you pay back your debts, and is the most important factor in your credit scores.
  • Records of certain legal events related to your debt, including foreclosures, bankruptcies and repossessions.
  • Any records of debts you've failed to repay and have been sent to collections agencies or "charged off" by a lender.

Credit reports do not contain any information about your employment status, income, bank account balances or other assets. Additionally, your credit reports won't contain any record of applications for unemployment benefits. That information is not a part of the public record, and can only be shared by unemployment agencies in a few situations.

Can Unemployment Make It Difficult to Get Credit?

Even though unemployment isn't a factor in your credit, it can alter your finances in ways that could make it difficult to get new credit. Along with checking your credit, prospective lenders will often ask how much you make and where you work when considering you for a loan. Lenders like to see that a borrower has a reliable income stream that will enable them to repay the loan in full, so one may view your application differently if you're unemployed when applying for a credit card or new loan.

If you expect to apply for new credit while unemployed, plan ahead to make sure you'll be able to cover the monthly payment based on any income you may have. If you'll use unemployment benefits to make your loan payments, have a plan for how to cover payments once you're no longer receiving those benefits.

Is Filing for Unemployment Bad for Your Credit?

Unemployment agencies are only allowed to share your history in a few rare scenarios, and there are no public records of who collects unemployment. Because unemployment is not included in your credit reports, it has no impact on your credit scores, and lenders cannot see whether you're on unemployment when they pull your credit.

Receiving unemployment benefits may actually help you maintain your credit while out of work due to the fact that it provides a reliable monthly income. Having at least some form of income during that time will allow you to purchase the essentials and might be enough to also cover the minimum payments on any debt you have.

Trying your best to pay at least the minimum payments on your debts will go a long way in making sure your credit doesn't suffer a big drop while unemployed. Any late or missed payments could have a negative impact on your score.

Indirect Impacts of Unemployment

Though being unemployed or collecting unemployment benefits will not directly impact your credit scores, not having a job could bring your credit down in other ways. When you lose your income, it could become difficult to pay all your bills on time and in full, which could result in missed or late payments.

Additionally, a loss of income could drive you to rely on credit cards more than usual, which can spike your credit utilization ratio. Your credit utilization ratio compares the total of your revolving account balances (credit cards and lines of credit) with the total of all your credit limits. As your ratio climbs, so, too, does its impact on your credit scores. To determine your utilization ratio, divide your total account balances by your total credit limits. Always try to keep your utilization under 30% to avoid hurting your credit scores.

These two factors—credit utilization and payment history—are the most important aspects of your credit scores, so any changes in these areas could be reflected in your scores. The good news? Negative impacts can be temporary, and your credit can recover once your utilization ratio drops again and late or missed payments age and eventually drop off your report entirely.

How to Protect Your Credit When Unemployed

While being unemployed can be stressful, it's usually temporary. During a period of unemployment, essential needs like food, shelter and transportation are the most critical concerns. But it's also important to think about your credit, since it could affect your ability to get loans and other forms of credit in the longer term.

To manage your credit while unemployed:

  • Monitor your credit. Checking your credit regularly can give you peace of mind and help you understand what is going on with your credit. Unless something drastic changes in your credit card spending or repayment, your credit score shouldn't fluctuate too much in a short period of time.
  • Continue making on-time payments. If possible, make at least your minimum payments on time to protect yourself from long-term damage to your credit scores. Paying the minimum keeps your account current, allowing you to keep your credit intact even if you can't pay down your debt as aggressively as you may like.

One way to keep up on your credit is through Experian's free credit monitoring service, which allows you to check your credit reports and scores so you'll be able to track your progress while you are unemployed and after you get back to work. Doing so can prepare you should you have a need for new credit in the future.

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