Does Unemployment Affect Your Credit Score? What to Know

Losing a job is stressful on its own. If you’ve recently applied for unemployment benefits, you may be wondering if that decision can damage your credit score. The good news is that it doesn’t. You may even be able to use some of the unemployment money to avoid missing payments, which could protect your score.

Most of the credit-damaging impacts of being unemployed are due to the loss of income. Without enough cash coming in, people are likely to fall behind on bills and debt obligations.

Discovering answers to questions like “Does unemployment affect credit score?” can help you better understand the implications of losing a job and applying for unemployment benefits.

Does filing for unemployment affect your credit score?

No. Simply applying for or receiving unemployment benefits does not appear on your credit report and is not considered by credit scoring models. Your credit score is based on information such as:

• Payment history
• Credit utilization
• Length of credit history
• Types of credit accounts
• Recent credit inquiries

Your employment status and unemployment benefits are not included in your credit report. If you need to claim unemployment benefits, you can do so without stressing about causing damage to your credit score.

How unemployment can indirectly hurt your credit

Though it doesn’t have a direct effect, several downstream impacts of being unemployed can damage your credit.

Missed or late payments

On-time payment history is the most heavily weighted factor used to calculate your credit score. When you miss payments, your score will drop. Missed payments will remain on your credit report for years, which worsens the damage.

If you are forced to miss payments when you are unemployed and waiting for benefits, prioritize necessities first. Reach out to your creditors before you miss a payment. They are more likely to work with you if you are proactive about your situation.

Increased credit utilization

Credit cards can be a valuable tool when you are dealing with a financial emergency like a sudden loss of your job. However, racking up credit card debt increases your utilization rate, and a high utilization rate can negatively impact your score.

Imagine you have a $10,000 credit limit and carry a balance of $2,000, which is a utilization of 20%. If you add $4,000 of charges to your credit card while unemployed, your total balance would be $6,000, which is a utilization rate of 60%.

New debt from loans or credit cards

Taking on new debts while unemployed may be necessary to cover your essential expenses. When you fill out a new credit application, the lender will run a hard inquiry. A hard credit check results in a small hit to your score.

If you quickly rack up a high balance on a credit card, you’ll run into a utilization rate problem. The cycle can be vicious and hard to break.

How to protect your credit while unemployed

Even if you’re temporarily out of work, there are things you can do to minimize the damage to your credit.

Prioritize minimum payments

If you can’t pay every bill in full, focus on making at least the minimum payment on your credit accounts. Paying the minimum won’t eliminate interest charges, but it can help you avoid late payments that damage your payment history. If your budget is extremely tight, prioritize accounts that are close to becoming 30 days past due.

Contact creditors about hardship programs

Many lenders offer hardship assistance for customers experiencing temporary financial difficulties. Depending on the lender, a hardship program may include:

• Reduced monthly payments
• Forbearance
• Temporary deferral of payments
• Waived fees

Not every lender will give you these options, but you don’t know what’s available if you don’t ask.

Keep credit utilization low

If you need to use credit cards to get by while you are between jobs, try to avoid maxing them out. Pay down your balances as soon as you can. Managing your utilization carefully can help reduce the pressure on your credit score.

Monitor your credit report

Keep a close eye on your credit report and score. You are entitled to one free credit report per year from each of the three major credit bureaus.

Does unemployment affect credit score? It can, but there are solutions

Becoming unemployed and even receiving unemployment benefits does not hurt your credit score. Unemployment benefits are meant to help people who have lost their jobs.

If you’ve recently become unemployed or are rebuilding your financial health after returning to the workforce, Kikoff can help. Our free and paid credit-building resources are powerful tools that can add positive payment history to your financial profile.

Kikoff offers a secure credit card, an invite-only credit-builder loan, educational resources, and more.

Sign up for a free Kikoff account today.