Credit Repair and Unemployment
The economic ups and downs of the past few years have caused more people than ever to become curious about unemployment. Whether these individuals are dealing with unemployment or underemployment, or just want to be prepared for the worst, it’s important to realize how your credit is affected by your employment status.
How Does Unemployment Affect Credit?
There’s a great deal of confusion as to what kind of information appears on a credit report. Understanding what information is included on a credit report can go a long way toward shedding some light on how unemployment affects your credit score. If you’re confused or want more information as to what a credit report includes, a credit repair firm or consumer advocacy agency can help you get the facts you’re looking for.
How Unemployment Doesn’t Affect Your Credit Score
First, the good news. There are several ways that people suspect unemployment can affect their credit score that aren’t accurate. This is largely due to the nature of the information that is included on a consumer’s credit report and credit history.
Information Not Included on a Credit Report
Unemployment claims are not included on credit reports or in credit history. Generally speaking, the only information on credit reports is identifying information, inquiries, debts, and public records. An unemployment claim is not part of the public record. Moreover, you don’t have to pay unemployment benefits back, so they are not a debt.
Another thing that’s not included on your credit report is your income. While many companies consider your debt to income ratio when determining your eligibility and terms for financial products, they get your income information from the applicant self-reporting. Some companies may ask for proof of income in the form of a paystub, W2, or tax return. Lenders and creditors then use that income and compare it to your debts, which are listed on your credit report, to determine your debt to income ratio. Therefore, the fact that your income has changed or been eliminated is not information found on credit reports.
How Unemployment Can Affect Your Credit
However, there are several ways that unemployment can affect your credit rating. These aspects of your financial status are impacted by lack of income, and can play a large role in how much of a risk lenders and creditors perceive you to be. Moreover, it’s important to note that more employers are looking at applicant’s credit reports when considering who to hire, so failing to stay on top of your credit and credit score could make it harder to find a new job.
One of the most likely results of losing your job is that your savings will decrease. You’ll likely draw on your savings to cover your expenses. Moreover, it will be difficult to replace your savings because you won’t be generating the same income you were before.
A lack of savings can reduce your ability to use credit score-boosting products like secured credit cards. A secured credit card is a credit card where you make a deposit for the initial credit limit. These offers are available to most people because the credit card company faces minimal risk, as you’ve already put down a deposit that covers the maximum you can spend on the card. These cards can boost your credit score by altering your revolving credit utilization and by helping you establish a track-record of on-time payments.
Late or Missing Payments
Whether as a consequence of a lack of savings or because of a lack of income, late or missing payments is the biggest way that unemployment can affect your credit score. Payment history makes up 35% of your credit score, so missing even a single payment can cause a substantial decline in your credit rating.
Prolonged unemployment can make it hard to keep up with your payments, and makes it more likely that you’ll wind up missing a payment. Credit scores attempt to calculate how likely it is that an individual will be 90 late or more on their payment. A payment that is 90 days late is considered a serious delinquency. Different scoring models can lower your score by the same amount as more serious financial situations like a tax lien, judgement, or bankruptcy if you have a serious delinquency on your report.
Higher Credit Card Balances
Unemployment can also result in higher credit card balances as you turn to credit cards to help cover the gaps you face due to lack of income. These higher balances can lower your credit score by increasing the amount of credit you use. Credit cards are considered to be revolving credit. Credit reporting agencies consider how much revolving credit you use against your maximum limits for revolving credit to determine your credit utilization.
Ideally, you’d want a credit utilization of 0%. However, you can generally use up to 25% of your revolving credit without facing any serious consequences for your credit score. The more revolving credit you use, the lower your score will be. As a result, unemployment can cause your credit score to decrease because you’re using a greater amount of your credit limit to cover your bills.
Unemployment and Credit Repair
Given that employers are looking to credit scores to determine the best applicants to fill an open position. Therefore, taking steps to improve your credit could be the thing that helps set you apart from the rest of the applicant pool for your next position.
Credit repair and credit repair companies can find ways to remove negative and inaccurate information from your credit report. Removing harmful information is one of the fastest ways to improve your score. Credit repair agencies can also help you plan a budget, restructure your debts, and point you to specific steps you can take to improve your credit. As a result, you’ll be able to avoid paying more for credit and loan products, while increasing the odds you can land the job you need to get you back on your feet.
As you can see, unemployment can be rough on your credit score. Credit repair offers one way of minimizing the negative aspects of unemployment on your credit score so that you don’t suffer long-term consequences and have a better shot at finding gainful employment again.
Emma has been helping people improve their credit scores for the past ten years. Prior to that, she worked as a credit repair specialist and consultant for several large credit repair firms. She got into the credit repair industry after graduating with a degree in Finance before getting her MBA.