Does Filing for Unemployment Affect Your Credit?

How Unemployment Can Indirectly Affect Your Credit

While the fact of being unemployed won't hurt your credit score, various potential consequences of losing a job will. Here's what to watch out for.

Missing Bill Payments

If you pay a credit card or loan bill more than 30 days late, your creditors can report the late or missed payment to the credit bureaus, and your credit score can suffer. Just a single missed payment can have a significant impact on your score, especially if it's rare for you to fall behind on payments.

The longer a bill goes unpaid, the more dramatic an effect it will have on your credit. The derogatory mark stating you've paid a bill late will remain on your credit report for seven years.

Higher Credit Utilization

Loss of income may understandably force you to turn to credit cards to cover essential expenses. But if you take on additional credit card debt while unemployed, that will increase the total amount you've borrowed and your credit utilization, or the proportion of available credit that's currently in use.

Higher credit utilization typically leads to lower credit scores because, to lenders and credit scoring algorithms, nearly maxed-out credit cards often indicate risk. Once your balance surpasses 30% of your credit limit on each credit card and across all your cards, you're more likely to see a bigger dip in your credit scores.

Taking on New Debt

Another way to afford necessities while unemployed is to take on new debt, such as an emergency loan or a different type of unsecured personal loan. While getting a loan can help you bridge a gap in your ability to afford the basics, it will increase your total debt load.

When you open a new credit account, a hard inquiry is added to your credit report and the average age of your credit history shortens, both of which can negatively impact your score.

What Personal Information Does Your Credit Report Include?

To alleviate some of the stress you may feel 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, such as your name, Social Security number, phone numbers and employers, if you noted them on applications for credit cards or loans in the past
• Account history, including credit cards and loans, their balances, when you got them, your payment history and the account's standing (such as whether it's current, closed or past due)
• Whether you've filed for bankruptcy

Your income level, marital status and bank balances are not included on your credit report.

Can You Be Approved for Credit if You Have No Job?

Lack of employment won't disqualify you from getting approved for a new loan or a 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, which could come from other sources.

Types of income lenders consider include:

• Government benefits (such as unemployment benefits)
• Money from freelance or gig work
• Cosigner income if you use a cosigner to qualify for the loan.

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.

Learn more: What to Know About Employment and Your Credit

How to Protect Your Credit While Unemployed

You can protect your credit from the potential financial repercussions of unemployment by taking the following steps:

• Make a bare-bones budget. First, overhaul your budget if you already have one, and if you don't, now's the time to start following a spending plan. Set up a bare-bones budget to cut discretionary expenses so that you can afford the necessities, such as housing, groceries, minimum debt payments, utilities and health care.
• Continue paying at least the minimum toward credit cards and loans. The most important way to protect your credit during this period is to continue paying every credit card and loan bill on time. Pay utilities and rent on time, too, so that those accounts don't eventually go to collections. Put your bills on autopay so they're sent from your bank account automatically, and make sure you have enough money in your checking account to avoid overdraft fees.
• Ask about creditors' hardship programs. To get some relief from those debt payments, write a hardship letter to your creditors asking for a lower bill, a payment pause, a reduced interest rate or late fee waivers if you've already fallen behind. You can also seek out established hardship programs available from your creditors and apply by calling the customer service line or your loan servicer.
• Look into financial assistance. There are several government programs that can help when you're struggling to afford the basics, including housing and food. Call 211 to talk to a specialist who can connect you with benefits or search the resources you may qualify for using the federal government's Benefit Finder tool.
• Take on new credit sparingly. Before you apply for a loan, 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. 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 may have more lenient credit requirements than traditional banks or online lenders.

Frequently Asked Questions

The Bottom Line

When you're unemployed, it's as important as ever to stay aware of your financial health. Check your credit scores and 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 so that your time between jobs doesn't significantly affect your ability to achieve your financial goals.