Unemployment can be challenging, especially when it comes unexpectedly. If you are the family’s sole breadwinner, it can be a pretty depressing time. While losing your job affects your life drastically, it doesn’t affect your credit score instantly and directly. However, it can indirectly impact your debts and future loan applications. Here’s everything you should know about how losing your job can affect your credit score.
What affects your credit score?
Various factors can potentially affect your credit score. For example, your payment history affects your credit score possibly the most. Apart from your payment history, other factors contribute to your credit score, including the age of your oldest loan account, the types of loans you currently have, and hard inquiries. Your lenders may not find out about you losing your job unless you tell them, but credit bureaus require you to update your income annually.
How losing your job may indirectly affect your credit score?
Job loss has no direct effect on your credit score. That being said, unemployment can cause a financial struggle. If you cannot pay your monthly bills and are making late or no repayments on your debts, your credit score can take a hit.
Here are more details on how these scenarios will impact your credit score:
- Falling behind on your loan repayments and credit cards
Unemployment can force you into the financial crisis corner. This could mean unpaid bills and miss on your loan repayments. Late repayments can be excused, but payments made after 30 days delay will get reported to all credit bureaus.
Your loan & bill payment history makes up for 35% of your credit score, so you can imagine how your score will be affected. The more behind you fall on your bills and repayments, the further your credit score may drop.
- Opening up new loan accounts
You might be tempted to open new loan accounts at different banks if you require money. This will have two significant effects on your credit score- first is that a new loan would display the lower age of your credit, which makes up about 15% of your credit score. The second effect could be seen by any hard inquiries that the banks may make when you apply for a loan. Hard inquiries can hurt your credit score as they make up 10% of your score.
- Increasing your credit card limits or taking out new loans
With insufficient savings, you will probably be forced to ask for a credit card limit increase or take a new loan if possible. This can hit your credit score hard. Your level of debt affects your score by 30%. Moreover, the more debt you acquire, the more your monthly repayments will be. If you don’t have a source of income, the total monthly payments for all loans combined can put you under a lot of pressure.
It’s best to keep a good credit score, even if you have recently lost your job. It may seem harsh, but failing to maintain your credit score can have a long-term impact on all your loans. A bad credit score might also get you a higher interest rate for future loan applications.
Besides, some recruiters also do a credit check while hiring, especially financial firms and banks. This means a bad credit score might even cost you a stable job.
It’s crucial to maintain your credit score while looking for a new job. If you struggle, get a few part-time jobs while still applying for more prominent, permanent job positions. This would help you pay off your monthly bills. We hope this helps you understand how unemployment affects your score and take preventive measures accordingly.