Losing a job is difficult in the best of times. When the economy is down, however, the impact of job loss is felt even more. When you pair this with the fact that finances will need to be adjusted and your credit score could be damaged if you can’t pay, job loss becomes downright terrifying. Let’s take a look at how unemployment can impact your credit score and what you can do about it.
Does Unemployment Show in Your Credit Report?
This is one concern you don’t have to be worried about. The fact that you are unemployed will not become part of your credit history, and it won’t show up in your score. Filing for unemployment, likewise, will not show up in your credit history. The only private information contained in your credit report is records of your financial accounts and hard credit inquiries. The only other record that could be included is if you’ve ever filed for bankruptcy.
How Does Unemployment Affect Credit Scores?
Being unemployed in and of itself doesn’t directly impact your credit score. The primary areas of concern you have to face is the requirement of continuing to pay at least the minimum on your credit card statements and loans.
High Utilization of Credit Cards May Affect Your Credit Score
The difficulty in unemployment is the potential necessity to use more credit than you usually would. Credit utilization is one of the most significant factors that contribute to determining your credit score. It’s recommended to keep your credit utilization to no more than 30% of your total credit limit. This means if you have a total limit of $10,000, then you should only have $3,000 of credit used at any one time.
If you go slightly over the 30% ratio, you won’t see significant changes to your score. If you go far over the percentage, however, your score will lose points. High credit utilization will always reduce your credit score. The higher you go over the recommended 30%, the more your credit score will be impacted. Nearly maxed-out credit cards indicate to credit rating companies that they might be dealing with a risky borrower. Even if you have all the intentions of paying your credit cards back down in full once you get a new job, your score will be impacted during the period when your utilization is too high.
Limited Funds or Income May Result in Late Payments
The most significant contributing factor to your credit score is your payment history. If you have limited funds and you don’t have savings stashed away to compensate for lack of a paycheck, you might need to miss payments on your credit cards. Unfortunately, this can significantly reduce your credit score. Even one missed payment can lower your score by as much as 90-110 points. If you miss enough payments that your account is sent to collections, your score could be damaged even more.
How to Help Lessen the Impact of Unemployment on Your Credit Score
Thankfully, there are several ways to help lessen the impact on your credit score when you’re unemployed. The key with each of these is to reach out to your lending agency and ask. Credit card companies can often provide a form of financial relief to customers, but they can’t help you if they don’t know you need assistance.
Common Forms of Assistance that Creditors Can Offer
Credit card companies and loan agencies can offer help when customers encounter a time of crisis, such as unemployment. Inquire with your lending agency to determine which of these options might be accessible to you during this time.
Lowering a Monthly Minimum Payment
If you need more time to pay off your bills, credit card companies and lending agencies can offer help to lower your monthly payments for a short duration until you get back on your feet. Ask them about these options to work out something that will help you manage your finances during unemployment.
Waiving or Refunding Late Fees
If you have a history of on-time payments, your credit card company will likely be more than happy to work with you and provide this option. When there is history and proof that you’re a reliable customer that pays back your bills, they’ll be more willing to waive the associated fees with late payments while you’re unemployed.
Reducing the Interest Rate
By lowering the interest rate, you can extend the amount of your loan and pay back less each month without it negatively impacting your finances.
Establishing a Payment Plan to Pay Off Existing Balances
A payment plan differs from your minimum monthly payment. Your lending company can work with you to adjust your monthly payment and come up with a better payment plan that you can manage even while dealing with unemployment. This may look like lowered interest, a lengthened period, or a waiver of monthly payments during a specified period.
The CARES Act
CARES is short for the “Coronavirus Aid, Relief, and Economic Security Act,” and it was signed into law in March. This act provides consumers with credit protections during a time of uncertainty, unemployment, and upheaval.
The act specifies how companies are to report data to credit bureaus for consumers that have payment accommodations in place. It also specifies that you can request that lending companies add a code to your credit report that indicates you were impacted by a natural or declared disaster. Coronavirus is a declared disaster. Though FICO doesn’t recognize the codes, VantageScore will disregard late payments for any accounts with the code attached.
It can be challenging to handle finances when you lose a job. Naturally, we tend to rely on credit cards to meet our needs and get us through. Keep this article in mind, so you don’t indirectly impact your credit score. Thankfully, however, there are options and financial relief that may help lessen the impact on your credit score during this unprecedented time.