Losing your job doesn't mean your credit score will automatically drop, but it can impact your credit if you aren't able to pay the bills
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- Your employment status isn't reflected on your credit report, and losing a job isn't a guarantee that your credit score will drop.
- If you don't have an emergency fund and you start carrying bigger balances on your accounts, your credit score will fall.
- It's also more challenging to get approved for new lines of credit when you're unemployed.
- Make sure you file for unemployment and consider all your financial options if you recently lost your job and need help making ends meet.
- Read Business Insider's guide to improving your credit score.
If you recently became unemployed and want to file for unemployment, you're probably wondering whether you qualify and what steps you need to take to enroll. You may also be wondering whether being unemployed will impact your credit score — and the answer is: not necessarily.
Why your credit score matters
Your credit score is a three-digit number that provides potential lenders, like credit card issuers and banks, an at-a-glance assessment of your risk as a borrower. A low credit score could make it more difficult to be approved for a loan, and it could also mean you'll get higher interest rates when you are approved for a new loan.
Credit scores range from 300 to 850. A good credit score is considered anything above 670, while an excellent credit score is considered anything above 800. Your credit score is based on five factors: your payment history, amounts owed, length of credit history, credit mix, and new credit. These factors are weighted differently, with payment history and amounts owed accounting for 35% and 30% of your score, respectively.
Given that payment history and amounts owed are so heavily weighted, losing your source of income can indeed have some effect on your credit score — but only if unemployment impacts your ability to pay your bills. We'll get into that more below, but first, let's make an important distinction.
Filing for unemployment doesn't show up on your credit report
Your credit report provides an overview of your financial situation, including your personal information, all of your past and present accounts, any collections or public records related to your accounts, and a list of all inquiries made by lenders. This is the information used to calculate your credit score.
As credit-reporting company Experian explains, filing for unemployment or receiving unemployment benefits won't show up on your credit report. Your credit report doesn't include any information about your current employment status, though it could list past employers if you included them on any credit card applications in the past.
Unemployment can impact your credit score — indirectly
While filing for unemployment won't affect your credit report, losing your source of income can have an impact on your credit score if you're unable to pay off your account balances.
One of the biggest factors that determines your credit score is your amounts owed, or the ratio of your credit card debt to your total available credit. This credit utilization ratio accounts for 30% of your credit score, and in general, you'll want to keep your utilization at less than 30% — or much lower if you're aiming for an excellent credit score north of 800.
Payment history is the other major factor determining your credit score, so don't forget to pay your bills on time. Even if you're not able to pay the full statement balance, make the minimum payment or whatever you can afford. If you simply skip a payment or make your payment late, you risk doing serious damage to your credit score, not to mention incurring late payment fees and interest charges.
Consider your options if you need to carry a balance
If you recently became unemployed, you may need to rely on credit cards more than usual to make ends meet — especially if you don't have an emergency fund to tide you over. Collecting unemployment benefits can help ease the burden, as could a stimulus check, but if you still find yourself coming up short, consider your options.
Some credit cards offer an introductory APR period, which can help you avoid interest charges in the short term, but after the 0% APR period ends, you'll begin accruing interest. There are also credit cards that offer an intro APR period for balance transfers, so you can move over existing debt to a new credit card and avoid interest for a limited time.
But don't count on getting approval for either of these types of cards if you lost your source of income — lenders are generally reluctant to extend credit if you can't prove you're able to pay them back, and issuers are also tightening their approval standards in light of the recent economic downturn.
Taking out a personal loan is another option, with the advantage of offering a fixed interest rate and a fixed monthly payment that never changes. You could also consider Tally, a debt-consolidation app that extends you a line of credit and helps you pay down debt at a lower interest rate.
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