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Unemployment can cause great financial stress, but having a plan can help you get through this temporary setback. While the most important concern is your immediate financial situation, some also worry about how unemployment will affect different parts of their lives. One area where unemployment will not have a direct impact is on your credit report.
Filing for or getting unemployment compensation will not appear on your credit report. In fact, credit reports won't update information about your employment status at all, unless you've recently applied for new credit.
Additionally, while employers you've worked for in the past might be listed on your credit report—if you included that information in credit applications—only data about your financial accounts impacts your credit score.
Losing a job could indirectly impact your credit, however, if it makes you more likely to run up high credit card balances or pay bills late. Those potential circumstances will show up on your credit report and affect your score. Here's what you need to know about unemployment and credit.
What Personal Information Does Your Credit Report Include?
To alleviate some of the stress you might be feeling about your employment status and its effect on your credit, it helps to understand what your credit report contains. Here's what you can expect to see:
- Identifying data: Your credit report includes your name, as well as any other names you've used; current and former addresses; Social Security number; phone numbers; and employers, if you noted them on applications for credit cards or loans in the past.
Creditors don't use employment history on your credit report when determining whether to work with you. They might cross-check that information against data you've included on your application for a loan or credit card to verify your identity.
- Account history: All the credit cards and loans you've had will be listed on your credit report, along with their balances, when you got them, your payment history and the account's standing, such as whether it's current, closed or past due.
- Public records: Bankruptcy is the only public record that appears on your credit report. A Chapter 13 bankruptcy will be listed for seven years, while a Chapter 7 bankruptcy will appear for 10 years.
Your income level, marital status and bank balances are not included on your credit report.
How Unemployment Can Indirectly Affect Your Credit
While being unemployed won't appear on your credit report or directly impact your credit score, loss of income could lead to circumstances that will. For example:
- If you use credit cards to pay for more expenses while unemployed, your credit utilization will increase. Your credit utilization ratio is the amount of your total available credit you're using, and it's one of the most significant factors in your credit score. High credit utilization can drive down your credit score since nearly maxed-out credit cards often indicate risky borrowers.
- Limited income could also lead to missed payments on loans or credit cards if you don't have enough savings to make up the shortfall. Since payment history is the biggest contributor to your credit score, missing even one credit card bill could lead to a drop in your score.
Utility bill payments typically aren't reported to the credit bureaus, so paying one cellphone or electric bill late likely won't have the same effect. (One exception is if you use Experian Boost®ø to help improve your FICO® Score☉ , though late payments are not considered when you use Experian Boost.) If you miss several bills, though, and the account is sent to collections, that could damage your score.
- Applications for new credit can also impact your score. If you apply for additional credit cards, for instance, each application will result in a hard inquiry on your credit report. It will stay on your credit history for two years and generally causes a temporary score drop. Lenders may determine that your search for new credit reflects poor management of your current accounts.
While you're taking whatever measures necessary to get you through a period of unemployment, your credit could see a dip. But keep in mind that credit scores are constantly changing, and a couple hiccups now won't affect your credit forever. Once you are back on your feet, you can take steps to improve your credit and get you closer to your financial goals.
Can You Be Approved for Credit if You Have No Job?
Lack of employment won't disqualify you from taking on new credit, such as a new loan or credit card.
A lender or credit card issuer is less concerned with your employment status than it is with seeing that you have a steady income, such as from unemployment benefits or savings. Lenders will also look at your credit score to confirm you have a history of repaying debts on time. If you've missed payments on your accounts or have taken on new credit since you've been unemployed, your credit score could have been affected, which may impact whether you'll be approved.
But before you apply for any new credit, consider whether you're ready to pay an additional monthly bill. Without a job, it will likely be more difficult to cover the expenses you're already responsible for, let alone new ones.
If you're feeling the pinch, instead of turning to a new line of credit, aim to make a budget and potentially cut back on spending. In cases when you truly need a loan to avoid falling behind on major expenses, consider a personal loan from a credit union, as credit unions often charge lower fees and interest rates and have more lenient credit requirements than traditional banks or online lenders.
Stay Up to Speed on Your Credit
It's crucial to stay aware of your financial health, whether you're employed or not.
Check your credit report during periods of unemployment to make sure you're not falling behind on bills, and to spot potential fraud. That way, you'll be in the best position possible to access new credit when you're ready to, and your time between jobs won't have significantly affected your ability to achieve the financial goals you dream about.