Tens of millions of Americans have filed for unemployment as the economy has been affected by the COVID-19 pandemic. It has become challenging for many to pay the bills. As if worrying about paying down that credit card wasn’t tough enough, people often wonder whether filing for unemployment will harm their credit. In fact, doing so and receiving unemployment benefits won’t have a direct impact on your credit score—although it may do so in indirect ways.
Continue reading to learn more about how being unemployed, and receiving benefits, may or may not affect your credit.
How Unemployment Does Not Affect Your Credit
Your credit report typically only includes information on your debts, inquiries, payment history, delinquencies, and public records such as bankruptcy. Since unemployment claims and payments are not debts or public records (you don’t pay them back), they won’t have an effect. And, unless you apply for new credit, you don’t need to report changes in income. Card issuers and credit bureaus therefore won’t see any salary or income changes should you lose your job.
In fact, lenders are usually only concerned whether you have a steady income. Your unemployment benefits or savings will do; it’s not really your employment status they care about. A history of repaying your debts on time is a key consideration, which is why missed payments affect your credit so much.
How Unemployment Could Affect Your Credit
While filing for unemployment by itself can’t hurt your credit, being unemployed can have secondary effects that can lead to credit issues. These include:
- Having less income available to pay off your debts. With less money, people may miss payments, which can drop their credit score significantly. Being unable to meet minimum payment requirements for cards, loans, and mortgages is a serious problem that leads to not only a reduced score but also late fees, penalties, and collections actions. It goes without saying that you should budget accordingly if you plan to take on more debt.
- Increased credit utilization, which means you’re using more of your available credit. This is especially a problem if using credit cards to pay for daily expenses. Increased spending can max out credit cards, which can lower your credit score, as this behavior is seen as riskier.
- Applying for new credit cards to use to cover your expenses. Hard inquiries can appear on your credit report and reduce your score. These inquiries can stay on your report for two years. A search for new credit may be seen as a sign your current accounts are being poorly managed.
Steps to Maintain Your Credit When Unemployed
While it is hard to get new credit or a loan if you are unemployed, you can maintain your credit by being careful. Here are some key steps to protect your credit while in-between jobs:
- Pay at least the minimum required amount on time.
- Cut your expenses and limit use of credit cards.
- Don’t apply for too many credit cards at once
- Have an emergency fund that covers your expenses for 3 to 6 months
- Ask creditors if they have financial assistance programs
- Continue your job search so your income isn’t limited for long
Contact American Credit
If you need to raise your credit score, American Credit can help assess your situation and address issues with your credit report using a pre-litigation approach. Our strategy is more effective than the dispute letter process. Whether you have a job or have filed for unemployment, credit restoration can help. To learn more about our credit repair service in Los Angeles, contact us for a free, no obligation credit consultation at 855-827-3496.