How Unemployment Affects Your Credit

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The U.S. economy created 280,000 jobs in May 2015, bringing the unemployment rate to 5.5 percent.  However, the unemployment rate for people working part time and those who have given up looking for work holds at 10.8 percent, meaning that despite an improved economy, unemployment is still a fact of life for many Americans. The loss of a job can obviously mean economic hardship; what about the affect on credit?

Ways Unemployment Does Not Affect your Credit

The good news: anyone looking at your credit report will not be able to tell you are unemployed.  For instance, there is no checkbox on your credit report marked “unemployed” or “employed” that lenders, employers or insurance companies will see.

Unemployment claims

In general, only identifying information, public records, inquiries and debts appear on your credit report. An unemployment claim is not a public record. Unemployment benefits are not debts; you are under no obligation to pay them back.   Therefore, unemployment benefits or claims will not affect your credit in any way.

Change in Income

A difference in your income, or the fact that you are not earning any more income will not show on your credit report.  Way back in the beginning when credit reports were first started (the 1950s and 1960s), they did contain salary information, but this information no longer appears on your credit report.

How Unemployment Could Affect Your Credit

Being unemployed will not affect your credit in the immediate term.  However, since unemployment is directly tied to your finances, it could indirectly affect your credit in the following ways:

A Loss of Job Means that Savings Will Probably Get Smaller

Savings are for retirement and emergencies, and the loss of a job certainly falls into this category.  Not many people save money when they are unemployed; most tap into their savings, depleting their funds.

A smaller savings account can prevent you from opening new credit.  If your credit is not good, you may want to apply for a secured card.  Secured cards require you to open an account with the issuing bank that will serve as security for the credit card balance.  If you do not have savings, or if your savings are too stretched to spare the funds, you will not be able to put the money down to secure a new credit card.

Of course, the biggest way a small savings account balance will affect your credit is that you don’t have enough money to get by during a tough time.  If such is the case, you may have to forego payments on some of your outstanding loans, which can damage your credit, leading us into the next category:

Missing payments

Even if you find part time work, your income will not be what it used to be and this could mean that you will have to miss payments on certain loans.  This could be highly damaging: your payment history makes up 35% of your credit score, and even one late payment can drop your score 100 points.

If you have a long period of unemployment, your payment “misses” could be even more severe.  Credit scores are formulated to predict the likelihood of a person to go 90 days late and once you have one 90 day late, your score is pretty much toast.   A 90 day late is considered a serious delinquency by the credit bureaus and the credit scoring models and can tank your score as much as a bankruptcy, tax lien or judgment.

Credit card balances go up

The other major factor in credit score calculations is how much of your available credit is being used, which is 30% of your score.  If you find yourself coming up short when it comes time to pay the bills, you may be tempted to use cash advances on your credit cards, or merely pay one bill online by using another credit card. Once your balance reaches 30% of your credit limits, you will damage your credit.

Even if you don’t rob Peter to pay Paul when making your loan payments, you may not be able to make more than just the minimum payment on your credit cards. When this happens, you will incur interest charges, which will be added to that credit card balance.

Bouncing checks

While bouncing checks does not directly affect your credit score, if you wind up short when covering checks you have written, you may find that the check will go into collections, and this will appear on your credit report.  In addition, your “bank account credit” will be damaged, as you will get an entry into ChexSytems, the credit bureau that banks use when determining customer risk for checking and savings accounts.  An entry in this system can prevent you from opening a bank account in the future.

Being unable to get a bank account may lead you into several of the solutions for the “unbanked” like prepaid debit cards, check cashing services, or payday loans.  All of these unbanked solutions have stiff fees, which can further strain your already stretched dollars and may make it more likely that you will miss payments or go further into debt.

Unemployment Can Mean Disqualification from Certain Loans

Many loans require you to have enough income to apply for new credit and if your loan is for a car or mortgage, you will be required to prove it with documentation like W2s and tax returns.  Your debt ratio is the total of your monthly payments from credit accounts (usually all the ones appearing on your credit report) divided by your monthly income.  Fannie Mae mortgages have debt to income ratio requirements hovering around 36%.  If your income is zero, your debt ratio is mathematically infinity; you will not qualify.

The CARD act requires that credit card lenders at least ask you what your income is when you apply for a new card, however, you will not be required to prove it.   You do typically have to swear that all information on the application is true, however.

If you are unemployed, you may not qualify for new credit even if your credit rating is good; this essentially is the same as having bad credit.

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