How Unemployment Impacts Your Credit
It is normal that people are concerned about how receiving unemployment could affect their credit and their long-term credit health.
As of June 18, 2020, the U.S. Department of Labor estimates that over 45-million people have filed for unemployment due to the COVID-19 pandemic.
Understanding how unemployment could impact your credit and what you can do to protect it may help you through this temporary setback.
Your unemployment does not affect your credit scores, according to TransUnion, an American consumer reporting agency. However, it can affect your score indirectly, and here’s how.
Unemployment benefits usually only cover a portion of what your previous income did. A recent consumer financial hardship study shows those who lost their job due to COVID-19 will be short an average of $1,004.50.
Payment history and the amount of credit that you are using at any particular time called, credit utilization, can take a hit if you miss payments or borrow against your available credit. By doing this it can affect your credit report since these are the two factors that make up your credit scores.
There is some good news: you can protect your credit health during unemployment fairly easily. The key to doing this is communication.
At the first sign that you will not be able to make your payments, contact the lender. Ask them if they have any financial assistance programs such as forbearance plans or late payment forgiveness.
You will be surprised and how many of the financial institutions are offering such programs.
Another good idea is to re-evaluate your current budget and see if you can cut some unnecessary expenses to realign your current income.
Some ideas to consider could be:
- Cut back on eating out and entertainment
- Cancel subscriptions
- Cancel or reduce digital services like phone, cable, TV, and/or internet
Above all, remember unemployment will not directly impact your credit score. Making good financial decisions, communicating with your lenders, and using the resources that are available can help provide stability in these temporary rough waters.
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