Worried you can’t pay your bills when you’ve lost your job? Fortunately, unemployment benefits provide a financial lifeline when you are out of work. You have some money to pay for life’s essentials, such as food and rent. So, how does collecting unemployment affect your credit?
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Why your credit score is important
Your credit score tells lenders how financially reliable you are. Lenders check your score to see how well you pay back what you owe.
When you have a decent credit score, you enjoy lower interest rates and more favorable lending terms. In addition to borrowing money, your credit score may be utilized for other purposes. Sometimes, landlords, insurance companies, or prospective employers check your credit score to gain further insights into your financial habits. So, protecting your credit score when you have lost your job becomes even more critical.
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How unemployment affects your credit score
Unemployment doesn’t directly affect your credit. However, what you get from unemployment can be significantly less than what you earn while working. So, changing your financial habits is a critical step to preserving your income and credit score.
Your credit score is a three-digit number that numerically reflects your:
- Payment history (35%)
- Credit utilization (30%)
- Age of credit history (15%)
- New credit applications (10%)
- Credit mix (10%)
Payment history makes up the largest portion of your credit score. With less money coming in, keeping up with your monthly payments can be a challenge. Pay at least the minimum due on your credit cards to avoid a negative impact on your credit cards.
Avoid using credit cards to pay bills when you have less money coming in. Credit utilization measures how much debt you use versus how much you have available. Your score can drop when you use more than 30% of your credit limit.
Applying for new credit can also affect your credit score. Each application generates a hard inquiry that can stick to your credit report for two years.
Why unemployment won’t appear on your credit report
Your credit report reveals your credit-based financial habits. For instance, your credit report includes your current and past credit use, repayment history, inquiries, and public debt information.
Your credit report does not include your income, employment status, or how much money you’ve saved. So your credit report remains unaffected when you collect unemployment.
Your unemployment credit report: why filing won’t hurt
Unemployment benefits help you get by when you have lost your job. What you get from unemployment is typically a fraction of what you’d earn while working, but it provides a stream of money to pay for life’s necessities, like rent and groceries.
Filing for unemployment doesn’t affect your credit, but your spending habits might. Missed payments, excessive credit card use, and inquiries could impact your credit report.
How to protect your unemployment credit score
Collecting unemployment won’t affect your credit, but you may need to take steps to protect your score as you search for a new job.
Make payments on time
Remember that your payment history has the biggest impact on your credit score. One past-due payment is enough to drop your score. Even if you cannot pay what you owe monthly, sending in the minimum payment can protect your credit.
Regularly check your credit score
Tracking your credit report can help protect your score. Errors and fraud can drop your score, so checking your credit report regularly is helpful. MoneyLion and Credit Karma have tools that can offer insights into your credit health.
Get a credit builder loan
Taking out a credit builder loan can help establish or rebuild credit. The goal of a credit builder loan is to show a consistent payment history.
When you take out a traditional loan, you borrow money upfront and pay it back over time. A credit builder loan switches this up — once you have made all monthly payments, you can access the loan amount.
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Ask your lender about financial assistance programs
If you worry about missing a payment, ask your card or loan issuer if they offer financial help. Many issuers let you defer payments when you’re in a tough spot — such as when you’re collecting unemployment income.
These programs may let you make partial payments or even pause payments temporarily. While your interest will grow, you will have time to get back on your feet without trashing your credit score.
Good spending habits help protect your credit score when collecting unemployment
Unemployment can help you navigate a challenging financial situation when you have lost your job. Collecting unemployment gives you the means to pay bills while you look for a new job, but the sudden income drop could impact your credit score if you aren’t careful. Curb your spending and watch your financial habits; you could emerge from this trying time unscathed.
FAQ
Can filing for unemployment hurt you?
You should file for unemployment benefits when you have lost your job and need money to pay essential bills. Unemployment income is usually less than what you make. Reducing your spending may ensure you have enough money for rent, groceries, and the minimum due on your cards.
Can you get a credit card without a job?
It may be possible to get a credit card without a job. Before pursuing a credit card without employment, look closely at your financial situation to ensure you can make monthly payments. Your credit score will be hit if you don’t have enough money and fall behind.
Does filing for unemployment hurt you?
While filing unemployment doesn’t hurt your credit, your spending habits may need to change since you have less money coming in. If you are late making your payment because you don’t have enough money or charge too much on your credit cards, your score could drop.
