What Does Unemployment Do to Your Credit?

A person filling out an unemployment form.

Being unemployed, filing for unemployment insurance or receiving unemployment benefits does not affect your credit score. Although being unemployed may affect your financial circumstances—and your credit score—indirectly, it will not directly change your credit score.

As long as you’re being careful in how you manage your finances while facing unemployment, you may be able to keep the negative effects to a minimum. Here’s what you need to know.

Will Unemployment Show Up on My Credit Report?

Your credit report provides potential lenders and creditors with a look at how you’ve managed credit in the past. It includes current and past credit accounts that have been reported to the bureau and haven’t aged off the report. It can also show:

  • Items of public record, such as bankruptcy, and certain financial judgments
  • Credit inquiries
  • Collections
  • Consumer statements and disputes
  • Charge-offs
  • Repossessions

Your employment history might also be on your credit report, but only if you’ve listed your job when applying for credit in the past. Filing for unemployment doesn’t show up on your credit report at all.

Ways Unemployment Can Indirectly Affect Your Credit Score

Even though unemployment doesn’t directly affect your credit, that doesn’t mean your score is safe no matter what. Because unemployment can cause serious disruption in your financial management, it can still send your credit score in the wrong direction. Here are a few pitfalls to watch out for.

1. Living Off Credit Cards

No longer having an income doesn’t stop your bills, and if you have no other funds available you may turn to your credit cards to make ends meet.

Be careful if you do so—while using your credit cards appropriately can help you raise your score, racking up large balances and only making minimum payments can actually lower it. Ideally, your credit utilization ratio—how much of your available credit you’re actually using—should be well below 30%. If you’re putting everything on credit cards, however, it doesn’t take long for this number to creep up.

It’s best practice to keep a close eye on your credit card balance and pay it off in full every month if possible.

2. Missing Payments

You may have to choose what gets paid at the end of the month and what doesn’t. If you end up having to miss a few payments while you’re unemployed, it can have a serious, negative effect on your finances and your credit score.

Payment history is 35% of your credit score, and just one missed payment can lower your score significantly. If you know you’re not going to be able to make your payment, contact your creditor, lender or service agent and ask if they have any options. They might be able to give you a grace period or lower your minimum payment so you can stay current.

3. Applying for New Credit

If you apply for new credit cards or refinance a personal or auto loan to lower your payment, doing so will lead to a hard inquiry on your report. Applying for multiple lines of new credit—leading to multiple hard inquiries on your credit report—in a short timeframe can have a negative effect on your credit score.

If you do apply for new lines of credit, research before applying to get a better idea of whether you’ll be approved or not. Keep an eye on your credit score and monitor any changes.

Will Unemployment Affect Applying for New Credit?

Being unemployed may affect your ability to apply for new credit. Most credit applications ask for your current employment status and yearly income, and a lack of both unemployment and income can influence your chances of getting approved.

However, there may be other options available to you. If you’re married and your spouse is still working, you may be able to apply jointly for new credit and get approved based on your spouse’s income.

Some creditors may also only check your credit score when you apply for new credit. Because unemployment is not listed in your credit report, you may be able to get approved based on a high credit score even while you’re unemployed.

Facing unemployment can be difficult, but being proactive in managing your finances can help you avoid damage to your credit during this time. It’s also important to remember that setbacks happen to everyone and are a part of life.

To take advantage of a free credit report consultation, contact Lexington Law today.