A credit report does not include unemployment information and, therefore, does not affect your credit score. Yet, despite not being a part of your credit report, there are ways that unemployment can indirectly affect your credit scores and bring about negative consequences.
Losing your job can be an incredibly anxiety-inducing ordeal. The strain it puts on your finances is likely the most stressful aspect of this temporary setback in your career. Depending on the context of your job loss and how much savings you have, you might be considering filing for unemployment to handle your immediate financial concerns.
Information Included in Your Credit Report
Your employment status and government filings concerning it are not information included on your credit report. To ease some of your concerns, it might be helpful to understand what information the credit bureaus include on your credit report.
Your credit report contains three types of information:
Identity Verifying Data
Your credit report contains identifying data like your full name, current and former addresses, your Social Security number, and current and former phone numbers. This data may include employers if you have named them in credit or loan applications.
The employment history included in your credit report is only used to verify your identity with the information you may have offered in your application.
Account History
Your credit history on your credit report will include every credit card and loan you have currently or have had in the past. Each account will consist of your balance, when you opened it, your payment history, and the account’s current status.
Public Records
Your public records are where some people think your unemployment filing may be reported; however, there is just one record that the main credit bureaus believe is pertinent to your consumer report.
Bankruptcy is the only public record contained in your credit report, and it remains there for a limited time. Chapter 7 bankruptcy falls off your credit report after ten years and Chapter 13 after seven years. Personal and business bankruptcies rose in 2023 when compared to the year before.1
How Unemployment Could Affect Your Credit Indirectly
While your unemployment filing is not a public record included on your credit report and therefore does not directly impact your credit score, unemployment circumstances could indirectly impact it.
If you make yourself aware of how your credit could suffer during this temporary loss of income, it will be easier to avoid specific actions that could hurt your credit.
Relying on Credit for Expenses
If you do not have an emergency fund set up to cover your expenses during your loss of income, it can be incredibly tempting to rely on credit cards to pay for your basic necessities. Doing this for a prolonged period of time, only further increasing your overall credit card debt, could be very damaging to your credit score.
Continuing to rack up high credit card balances on your credit card accounts without the income to make more than the minimum payment causes your credit utilization ratio to skyrocket. Your credit utilization ratio is the amount you owe in relation to the total available credit you have. It is one of the weightiest factors in your credit score calculation. The higher the credit utilization ratio, the more your FICO score could decrease.
Missed Payments With Limited Income
A sudden lack of steady income could cause you to miss your credit card monthly payments. Not making these bill payments on time, even the minimum payments, or making late payments could have a negative impact on your credit report as your payment history is the most significant factor in your credit score.
Every missed payment is reported to the credit bureaus and will show up on your credit score once FICO recalculates using the newest information in your payment history.
After several missed payments in your credit history, your credit card account’s status will change from current to past due, reflecting poorly on your credit report.
Being Denied for New Credit
Applying for new credit to make up for your lost income only to be denied will also show up as a negative on your credit reports. Every application for a new credit card or an increased credit limit will get reported as a hard inquiry to the three main credit bureaus. This is also true for any kind of new loan, such as personal loan options, installment loans, auto loans, and quick cash loans.
Each one you make can lead to a temporary FICO score drop, and having too many of them on your report can further hurt your credit. For this reason, applying for new credit when you don’t have a steady income is unwise.
How to File for Unemployment Benefits
Applying for unemployment insurance benefits looks different depending on where you live, as unemployment programs are managed and dispersed at the state level. Even though there might be discrepancies between states, we can outline the basic process you will need to file for unemployment successfully.
First, you will want to confirm that you meet the eligibility requirements for financial support outlined by the US Department of Labor, this includes that:
- “[You] are unemployed through no fault of your own. In most states, this means you have to have separated from your last job due to a lack of available work.”
- “ [You] meet work and wage requirements. You must meet your state’s requirements for wages earned or time worked during an established period of time referred to as a ‘base period.’”
- You must also meet any other additional state-specific requirements.
Next, fill out the application to file at your state’s unemployment website. You should aim to do this the moment you are no longer working if you believe you are eligible for unemployment compensation.
Collecting unemployment benefits as soon as possible will prevent a longer lapse in steady income and decrease the chances of your credit score being indirectly impacted.
What Information Do I Need to File for Unemployment?
Have this information on hand when filling out your unemployment application:
- Social Security number.
- Details of your employment history over the last 18 months. You’ll want to have the company name, supervisor’s name, company address, and phone number.
- Driver’s license number.
- The Employer Registration number or Federal Employer Identification Number.
- Wages you earned and how often you were paid.
- The reason you are no longer working or working reduced hours.
After filing for unemployment, it’s wise to begin searching for extra income ideas immediately, even while waiting for the dispersal of unemployment benefits. Reducing the period that you are unemployed will ensure the stability of your credit score and increase your overall financial health.
Ways To Protect Your Credit Score While Unemployed
While you are collecting unemployment benefits and job hunting, there are a few reasonable efforts you can employ to protect your credit history in the interim before obtaining a reliable monthly income once again.
If you have one, rely on your emergency fund for any necessary expenses rather than on your credit cards. Ideally, you will want to have an emergency fund with a few months of income saved up to cover your needs. It is best to be prepared for every eventuality that could come your way.
Receiving unemployment benefits could make all the difference in how your credit score may be impacted by job loss because it ensures that you have some kind of steady monthly income, even if it is less than you are used to. Don’t let pride or hesitance stop you from getting the assistance you need.
And lastly, even if your current employment status has a negative impact on your credit score, it is merely a temporary setback that will not last long. Once you have a new job, you can make quick work of restoring your credit score to how it was. Any minor damage inflicted within a short period can easily be reversed, and you will bounce back in no time.
Key Takeaways With CreditNinja
It’s essential to understand that credit reports do not include employment status or unemployment filings. However, the financial strain from unemployment can lead to increased credit card usage, missed payments, and potential denials for new credit, all of which can negatively affect your credit score. To safeguard your credit during periods of unemployment,
CreditNinja advises you to use available emergency funds, apply for unemployment benefits right away, and actively seek alternative income sources.
References:
- US bankruptcy filings surge in first half of 2023 | Fox Business
- Does Filing for Unemployment Affect Your Credit? | Experian
- Does Filing for Unemployment Affect Your Credit Score? | Business Insider
