If you’ve been laid off recently, the last thing you will want to worry about is how your credit report will be affected by this temporary situation.
There is good news and bad news for you. First the good: your credit score will not be directly affected by your lack of employment. The bad: your lack of income could affect your ability to pay your bills and therefore your credit score could be impacted negatively. Let’s go over each of these points.
Your credit score will not be directly affected
Your credit report contains personal information about you, such as your name, social security number, your address and where you work. If you are temporarily unemployed, this information will not appear on your credit report, so any lender who takes a look will not know about your financial setback. Your employment information is only updated when you apply for new credit and list your employer on the application. This information is not retrieved from the IRS or any government entity. You may see a list of past employers on your credit report, but there are no dates on any of this information.
Your employment history will not affect your credit score at all.
In addition, any compensation you receive as part of your unemployment benefits will not appear on your credit report. Indeed, your salary or wages for any job you do will not appear on your credit report, ever.
How unemployment can indirectly affect your credit score
Lowered income can affect your credit score in three ways:
- Lowered income can affect your ability to pay your bills.
If your income declines dramatically, which is safe to say happens in the majority of cases (except in rare cases where some people have received more money than lost wages under the 2020 CARES Act), your ability to pay bills might be affected. If you are late on making payments to lenders and credit card issuers, this will affect your credit score.
35% of your credit score is based on payment history, that is, if you pay your bills on time (no later than 30 days from the due date). If you currently enjoy a high credit score (a high credit score is anything greater than 780 (based on a range of 350 – 850), making even one late payment can send your score tumbling down. As part of the CARES Act, there was no provision put into law that will exempt late payments (whether or not they will count against you) which happened due to the Covid-19 pandemic.
- Your credit utilization could go up.
Credit utilization is 30% of your credit score. If you use your credit cards to help make up for the shortfall in income, you could see your credit utilization rise. Your credit utilization is the ratio of your balance to your total credit line per creditor. The general guideline is to keep your credit utilization below 30%, and optimally below 10%. The more money you charge on your credit cards, the higher your credit utilization. Maxing out even one credit card will seriously impact your credit score.
- You could open up new lines of credit.
Opening new lines of credit could affect your credit score. On one hand, the credit scoring model reacts favorably to new lines of credit being added to your credit report (10% of your credit score) – up to a point. Every time you open up a new line of credit an inquiry is placed on your credit report, and this can reduce your score by 2 to 5 points, on average. In addition, new credit reduces the average age of your credit lines and this is 15% of your score.
Can you apply for new credit when you are unemployed?
The answer is yes, there is nothing stopping you from applying for new credit. However, lenders and credit card companies will require you to put down your income on the application. If you are getting a mortgage of any kind, whether it’s an equity line of credit or a refinance, you will be required to verify your income through documentation. Credit card companies will generally not require you to verify income; auto lenders will generally not require you to verify income if you have great credit and you are putting down a large amount of money.
If you are unemployed, taking on additional financial responsibility is probably not a good idea – if you are having trouble paying your existing bills, adding to the monthly total may not be in your best interest.
If you are having trouble paying your bills and absolutely need a line of credit to make it through your crisis, consider getting a personal loan at a credit union, as they typically are more lenient with their credit guidelines and have lower fees. If this is not feasible, making a budget and cutting back on spending is the way through to getting you back on your feet.