How Unemployment Can (and Can’t) Affect Your Credit
Key takeaways
- Unemployment won’t directly affect your credit score.
- However, unemployment can indirectly impact your credit score if it leads to you taking on more debt or missing payments.
- You can rebuild your credit score over time by managing your payments and accounts responsibly.
Losing a job can feel like getting caught in a sudden rainstorm, leaving you scrambling for cover. But at least it won’t hurt your credit score directly, since losing your job or applying for unemployment benefits won’t show up on your credit report.
On the other hand, financial strain from unemployment could hurt your credit indirectly if you add more debt or have trouble paying your bills.
What happens to your credit when you’re jobless?
The good news
Your job and unemployment status doesn’t affect your credit report or credit score.
Lenders usually look at your credit score from either FICO or VantageScore, which are based on items like your payment history and how much of your credit you use — but not on your income or job status. They’re not listed on your credit report, either.
The not-so-good news
Unemployment could have trickle-down consequences. Some, like having less savings, can affect things down the road. Others, like being late on your debt payments, can seriously damage your credit.
4 ways unemployment can affect your credit
1. You may not be able to pay your bills on time
Your payment history usually makes up 35% to 40% of your credit score, making it the single biggest factor. If you miss a payment and your creditor reports it as delinquent — usually if you’re more than 30 days late — your score will feel it.
Don’t panic if you’re late just once or twice. If your credit history is strong, it shouldn’t damage your score too much.
However, if you default on a loan or your bills go to a collection agency, the hit could be significant.
2. Your credit card balances may increase
Between 20% and 30% of your credit score is based on how much of your available credit limit you’re using. This is known as your credit utilization ratio, and a high one can weigh down your credit score.
When money is tight, you might turn to credit cards to cover everyday expenses. This may cause your credit utilization to rise, and your credit could take a hit — even if you pay your bills on time.
Plus, if you’re just making the minimum payments, you’re probably racking up a lot of interest charges. Interest charges can increase your balance, even if you’re not charging anything new.
3. Your savings account may shrink
A healthy emergency fund is a great financial cushion if you lose your job. But if you’re pulling from your savings to pay bills, that cushion could deflate fast.
Even though your credit report and score don’t reflect how much you have in the bank, sometimes your savings can affect whether you get approved for a new loan or credit, as well as how much interest you pay.
For example, when you apply for a mortgage, lenders may look at all your assets, including money in your savings account, retirement accounts, CDs and other investments you might easily convert to cash.
4. You may have to resort to opening new credit cards
If you run out of cash and max out your existing credit, you might consider applying for new credit cards to stay afloat. This, too, can hurt your credit score.
Taking on a lot of debt in a short amount of time can lower your credit score, and even credit pulls themselves — the inquiries a company makes into your credit before approving you — can ding your score a little.
2 ways unemployment can’t affect your credit
1. Your employment status isn’t a matter of public record
The fact that you’re unemployed will never show up on your credit report. Some lenders might ask about your employment when you apply, but they won’t see it in your report or credit score.
It’s possible some previous employers might appear on your credit report, but the report doesn’t provide a history of past jobs or your current employment status.
Further, you should know that the Fair Credit Reporting Act (FCRA) says that employers must receive your permission before requesting your credit report.
2. Income isn’t part of your credit report
Your credit report focuses on how you use and manage debt, not how much money you make. Your income won’t appear on your credit file or be used in credit score calculations.
So if you’re able to pay your bills while unemployed and don’t have to rack up debt, your credit score might not be affected at all. That’s another reason to make sure you have a large enough emergency savings fund.
What you can do to improve your credit
If your credit score does take a hit due to unemployment, don’t despair. The damage isn’t permanent, and there are steps you can take to improve your credit score.
Make payments a priority
Once you have a source of income again, make paying your bills a priority. And as much as you can, try to begin chipping away at those credit card balances and keep them low. Pay off debts when you’re able.
Manage your accounts
Avoid opening new accounts if you don’t need to — but at the same time, don’t close your old ones. Keeping a zero balance is usually better for your credit score than closing the card.
Wait it out
Even if you do nothing else, time is your friend when it comes to your credit score. As long as you begin paying on time again, late payments have less of an impact on your credit score with every year that passes.
Most negative information disappears from your credit report after seven years, although bankruptcies can stay on your credit report for up to 10 years.