Does Unemployment Affect Your Credit Score?

Does Unemployment Affect Your Credit Score?

Reading Time: 4 minutes

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?

Stated by credit repair experts, 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. 

 

unemployment effect on credit

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.

Making Sense of Millennial Credit Card Delinquency

Making Sense of Millennial Credit Card Delinquency

Reading Time: 4 minutes

The New York Federal Reserve report recently shared a chart that does not bode well for young millennials. It showed a trend of 18-29 year-olds who are more than 90 days delinquent on credit card payments.

This can be concerning for a few reasons; one, because the millennial generation has been traditionally known up to this point as being debt-averse and critical of banks and creditors. The millennial generation grew up watching their parents struggle during the Great Recession that ravaged the US economy during the late 2000s.

Economists believe that this was the genesis for the millennial generations’ distrust in banks and reluctance to take on credit card debt. In fact, between 2008 and 2012, only 41% of adults in their twenties even had a credit card.

The point is that up until very recently millennials have been cautious with their money and typically responsible with credit card debt if they even had any. But that is not the only concerning factor to this growing trend.

Millennial Unemployment

Having credit card debt is one thing but not having any means to pay it back is a much more alarming notion, but that is the reality that many millennials are facing. Just a few years ago, the millennial unemployment rate was at a staggering 12.8%. It is even grimmer when you compare that number to the 4.9% of other eligible age groups that were unemployed at the same time.

The US economy has put the Great Recession behind it and has been experiencing growth for the last decade, so the jobs are out there. The problem is that millennials tend to have higher expectations when it comes to getting a job.

Millennials often get looked at as a remarkably entitled generation of people, and this reflects in the way they select jobs. Many job offers are turned down by members of this generation because they were expecting a higher pay rate even in comparison to their lack of experience.

Education may have something to do with the millennial unemployment rate as well. Many companies are reporting that the upcoming workforce is lacking in real-world skills like critical thinking and basic communication. Millennials are also more likely to have gravitated towards theoretical studies in their college educations, which doesn’t help the situation much.

This lull in employment could not have come at a worse time for millennials either. It is generally agreed by people of the previous generation that it is much harder to get started in life financially these days than it was for their age. Part of this has to do with the increasing cost of higher education, so student loan debts are higher than ever.

This creates a vicious cycle for millennials in terms of job prospects. For example, a fresh-faced college graduate may open a line of credit to help furnish a new apartment with the hopes of landing a job soon. Maybe he also has a significant amount of student loan debt. Things are shaky as he or she is first entering the job market, and a combination of high expectations, mounting debt and lack of real-world skills are making it difficult to land a job.

So their credit scores are taking a nosedive and guess what: some companies will actually look at a candidate’s credit score and factor that into their decision to hire or not.

What is Contributing to Millennial Credit Delinquency?

Seeing a generation traditionally wary of credit card debt and realizing that it is harder for them to get a job are both bad omens but there what is causing the actual rise in delinquency among millennials?

One of the most immediate contributors to the increasing amount of millennial credit card debt is raising rates. In 2018 interest rates were at a staggeringly low level but they are beginning to rise again, meaning that even people with good credit are facing interest rates of 18-25%.

Student loans are another factor in this trend. The prior generation had the benefit of much more lenient crediting when it came to student loans with significant banks offering specialized student credit cards. These student credit cards were relatively easy to come by, but the Credit Card Accountability Responsibility and Disclosure Act (also known as the CARD Act) of 2009 changes all that.

Now students have to show proof that they will be able to pay back student loans or at least evidence that their parents would help them. This has resulted in millennial students taking high-interest loans for their education, which can be challenging to claw one’s way out of.

Keeping Perspective

This all sounds like a financial emergency, but it is crucial to keep things in perspective. Even with a rise in millennial credit card delinquency the debt-to-income ratio as reported by the Federal Reserve is the lowest it’s been since 1980. Delinquency rates have also been at a record low in the past year, so we are nowhere near a financial crisis even with this uptick in millennial payment delinquency.

Many millennials are just starting to build their credit and hit the job market, so this is not necessarily a trend that will continue. While all young adults should be careful and responsible with credit card debt, the recent Fed report should be more of a precautionary tale than the harbinger of an all-out crisis.