Does Unemployment Damage Your Credit?
We’ll classify this one under glass half full. You see, many people suspect that unemployment damages their credit standing, but that’s just not true. Unemployment itself is not something that the credit bureaus keep tabs on or factor into your credit score, but it’s important to note that certain side effects of unemployment can impact how lenders, potential employers, etc. see you. That means it’s important to understand what can hurt your credit while you’re out of work and how to prevent any damage.
But first let’s start with why your credit standing is important. Your credit score is essentially your financial responsibility packaged neatly into a three-digit number. It provides a quick and easy way for financial decision makers to gauge your past ability to do things like make on-time payments on credit cards and loans, avoid spending all of the money afforded to you as soon as it becomes available, and minimize debt. As such, your credit standing is a driving factor in loan and credit card approval, the interest rates you get, whether or not you can lease a car or rent an apartment, your ability to land jobs in certain fields, etc. In other words, it not only has the potential to save or cost you a lot of money over the course of your life, but damage to it might make it harder to even rejoin the workforce and begin making money once again.
Ok, with that being said, let’s transition into the types of things that can damage your credit while you’re unemployed. The biggest is, without a doubt, falling behind on your monthly bills. When you miss one monthly payment, your account becomes delinquent. When you miss two, your tardiness gets reported to the major credit bureaus (Experian, Equifax, and TransUnion), and your credit starts to suffer. Each subsequent month that you miss a payment, the credit score damage worsens. Aside from missed payments, your credit may also suffer if you max out your credit cards (i.e. spend up to your limit every month), rack up debt, or open a bunch of new credit cards to maximize your spending power during the period that you are without income.
So how do you keep these things in check?
There are a number of ways, but protecting yourself prior to becoming unemployed is the best course of action. No, I’m not talking about signing up for credit card payment protection, also known as credit card insurance, because that’s largely a rip-off and will not help you pay other bills. Instead, you should set up an emergency fund, into which you deposit money every month until you have 9 or so month’s income saved up. If you get laid off, this will keep you afloat until you find a new job and will prevent you from incurring credit score damage, not to mention entering the deadly debt spiral.
If you’re currently unemployed and have a way to at least make minimum payments – via unemployment benefits, perhaps – then do so. This will keep you current, thereby preventing the credit score damage caused by delinquency. The one thing you don’t want to do is pay less than the minimum or make a payment once in a while because either will only serve to delay the inevitable while ensuring that you rack up fees and interest in the process.
Finally, whatever unemployment and your financial reserves can’t cover until you regain your income, you can transfer to a 0% balance transfer fee credit card like the Slate Card from Chase when you find work once again.
After all, even though it might be difficult to see at the moment, unemployment will hopefully be a minor blip in a long career. Do not allow its effects to follow you around for years.
Image: Luna Vandoorne/Shutterstock
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