unemployment on your credit?Although unemployment is a normal occurrence that can happen to anyone at any time, it’s a situation no one wants to find themselves in. Unemployment can come with some obvious economic and financial hardships, but how does it impact long-term financial indicators like credit scores and credit reports? In this post, we take a look at the relationship between credit and unemployment and provide some tips to help you manage your credit, should you find yourself without a job.

Do credit reports detail your employment status?

Given the central role that credit reports play in shaping your credit scores, one of the primary concerns you might have after becoming unemployed is whether or not unemployment is reflected in your credit reports. The good news is that neither creditors nor credit bureaus actively collect or request this information, so you don’t have to worry about your unemployment status directly impacting your relationships with creditors and lenders. As such, changes to your income or requests for unemployment benefits won’t impact your credit in any way.

That said, as we’ve mentioned before in another post, some credit reports do contain sections which detail aspects of your history of employment like employer names and your occupations. In some cases, if the information is available, your hiring date for each position might also be listed. But if creditors don’t collect your employment information, how does such information get on your credit reports? This information usually comes from details you may have provided to creditors and lenders when you apply for a credit account, such as a credit card, as you’re required to input your income and employer (or occupation) as well as provide pay stubs, depending on the type of credit you’re applying for (e.g., credit card applications usually don’t require pay stubs, but a home loan application will). This means that as long as you don’t apply for a new credit account while you’re unemployed, your credit reports will not get such information. Additionally, it should be noted that your employment information has no bearing on your credit scores.

What are the ways unemployment impacts credit?

While unemployment doesn’t have a direct impact on your credit, as we detailed above, it can put you into a situation in which it becomes difficult to pay your bills, which can impact your credit reports and scores. Those of you fortunate enough to have a bulky rainy day fund can likely defer the threat of missed payments, but there are immediate effects that unemployment has which can’t be avoided. Access to new loans and apartments, for example, will become more difficult as many applications require that you submit W2s, tax returns and/or pay stubs. As such, it makes sense to avoid such applications until you have a job again — unless you have a spouse, as 2013’s revision of CARD Act allows you to submit spousal or partner income as proof of income as long as the applicant (you) has reasonable access to that income (e.g., living in the same household).

How can I protect my credit if I’m unemployed?

Unfortunately, being unemployed puts you in a tough spot without much financial flexibility, as we mentioned above. Adjusting your spending to fit your budget and looking for alternative sources of revenue are obvious steps to take, but make sure you also consider the following:

  • Continue to pay your bills as long as possible. To stave off the worst effects that unemployment can have on your credit, you should continue paying all your bills on time. With regard to loan payments and credit card bills, you should prioritize avoiding default over paying down debt, so don’t feel bad if you can only make the minimum payments. Also, consider cutting non-essential services out of your life, so that you can designate your funds toward necessities.
  • Negotiate monthly payments. Many creditors and service providers are surprisingly receptive to individuals who have made consistent payments and are proactive about notifying them about potential financial hardships. As such, if you find yourself unable to make your monthly payments, don’t be afraid to call your service providers and downgrade to the lowest possible service tier or even ask for a discount, as they may be willing to help you out. For creditors and lenders, you can start by inquiring about any hardship programs. If your creditors and lenders don’t provide such a service, you can also try negotiating temporarily reduced monthly payments on your own or with a credit counseling agency who will provide you with a debt management plan.
  • Settle potential debts. For some higher interest debts, if you have a sizable emergency savings, you might want to settle these debts for a reduced amount. Talk to your creditor or lender about your situation and negotiate a final lump sum payment for an acceptable portion of the remaining balance. If you successfully do so, make sure that the account is marked and reported to credit bureaus as “paid in full,” as a settled debt isn’t always reported like that. It helps to get your creditor or lender’s commitment to settle in writing so that you have proof that your reduced payment paid off the balance.
  • Don’t take on additional debt. Unlike other financial emergencies where it may make sense to take on debt, since unemployment affects your income stream, it makes applying for loans or credit far too risky. With many applications requiring some proof of employment or income, it’s more likely that you’ll end up with your credit pulled and an application rejection, which would hurt you more than it’d help. Additionally, you’ll want to avoid using your credit cards to support your lifestyle while you’re unemployed. This can not only leave you with mountains of debt once you’re employed again, but it could also increase your monthly payments, potentially making them unmanageable, which will land you in more financial trouble.

Although unemployment can be a difficult situation to deal with, it doesn’t always have to impact your credit. For additional credit-related and financial advice, keep reading our personal finance blog.