Does unemployment affect your credit?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Being unemployed, filing for unemployment insurance or receiving unemployment benefits doesn’t affect your credit score. An unemployed status may affect your financial circumstances—and your credit—indirectly, but it won’t have a direct effect on your credit.

As long as you’re careful about how you manage your finances while facing unemployment, you may be able to keep the negative effects to a minimum. Here’s what you need to know.

Does unemployment show up on your credit report?

No, unemployment doesn’t show up on your credit report. Salary, employment status and filing for unemployment are all factors that don’t appear on credit reports. Some information about your past employers may show up on your account if you’ve included that information in previous credit applications, but only as places of employment, not with regard to your current work status or income at those jobs. 

You can divide the information found in your credit report into four categories:

• Personal identifying information: This includes your name, address, SSN, birth date and sometimes previous and current employers.
• Credit accounts: Information associated with these accounts includes the dates they’re opened or closed, whether the accounts are up to date or delinquent, the types of accounts, the credit limits, your payment history and account balances.
• Credit inquiries: This will show the number of hard inquiries made by potential lenders and other entities regarding your credit.
• Public records: This will show instances of public records, including bankruptcies filed.

What isn’t found in your credit report includes your marital status, income, employment status, balances in savings, checking or investments, criminal record, education, gender, race or sexual orientation. 

Ways unemployment can indirectly affect your credit

Your FICO^® credit score is made up of five factors: payment history (35 percent), amounts owed (30 percent), credit history (15 percent), credit mix (10 percent) and new credit (10 percent). Understanding how these five factors work will also give you a better understanding of how certain situations—such as unemployment—can affect your credit. 

Let’s look at some examples of how unemployment can negatively affect your credit. 

Late or missed payments

Unsurprisingly, unemployment often leads to late or missed payments. If you don’t have sufficient money in savings, the sudden lack of income can make it challenging for you to keep up with bills. This can quickly impact your credit. Payment history is the top factor contributing to your credit score, and one late or missed payment can cause your credit to take a hit. 

Consider contacting your lenders and asking for flexibility with your payments until you obtain another source of income. Many lenders allow you to pause or reduce your payments for a few months, which helps avoid additional late or missed payments hitting your credit report. 

High credit card usage

Amounts owed is the second biggest factor contributing to your credit score. You should keep your credit utilization ratio (which is the amount you owe versus the total amount available to you) as low as you can to avoid hurting your credit. If you start putting everything on your credit cards because you’re unemployed and you can’t cover your expenses with your savings, you’re much more likely to increase your credit utilization ratio. 

You can avoid relying on credit cards in this situation by increasing emergency fund. Most financial experts recommend three to six months of expenses saved up so you can keep yourself afloat if you ever lose your job or have another emergency. 

If you’re currently unemployed, consider seeking alternative sources of money. Credit cards come with exceedingly high interest rates (often ranging from 18 to 30 percent), so consistently using credit cards without paying them off in full can be very expensive. Instead, try to see if you can apply for a loan at a lower interest rate or borrow money from a friend until you get back on your feet. 

New credit applications

If you’re unemployed and need cash quickly, you may want to take out a new credit card or a loan. While this may be helpful, remember not to apply for several new credit accounts all at once. Each new credit application will come with a hard inquiry, and although one hard inquiry may have a minimal effect on your credit, several in a short period of time can have a more significant impact. 

A good rule of thumb is to wait at least six months between each credit application. If you need new credit to get you through this period of unemployment, find one type you are most likely to get approved for, and stick to it. Several new accounts are not the best solution. 

Does unemployment affect your chances of getting new credit?

Yes, unemployment can impact your chances of getting approved for new credit. However, this isn’t because your unemployment shows up on your credit report—it’s actually because potential lenders are likely to ask for your employment status and income as part of their vetting process. 

Simply put, lenders don’t want to give credit to people they think won’t pay it back. To reduce their risk, they thoroughly inspect applicants to ensure they have enough money to pay their lenders and have demonstrated a habit of paying their lenders. You’re unemployed status will worry lenders and they will assume you have no money or insufficient money to pay them back, so they’re less likely to approve your application.

Tips for applying for credit when you’re unemployed

Getting new credit while unemployed may be difficult, but fortunately, it’s not impossible. Some of the ways you can increase your chances of getting credit are:

• Getting a cosigner: A cosigner on your loan or credit card is obligated to pay your outstanding debts if you can’t do it yourself. So, getting a cosigner helps lenders feel more comfortable that they’ll be paid no matter what.
• Applying for a secured card: A secured credit card is backed by a cash deposit for the credit balance. For example, you put down $500 and receive a credit card with a $500 credit balance. This type of card reduces the lender’s risk because they have the deposit to pay off the balance if needed.
• Becoming an authorized user on another card: Consider whether you have a friend or family member willing to add you as an authorized user on their card. This will allow you to access their credit card. And, as an added benefit, you’ll benefit from their payment history, which can work to help improve your credit.
• Working to build your credit: You may choose to use this time to start building up your credit. A higher credit score typically means you get access to more credit options, higher credit amounts and better interest rates and loan terms. Improving your credit can have a long-term positive impact on your financial well-being.

Alternatively, you may want to avoid applying for new credit during this time. You’ll have to decide what’s best for you during your period of unemployment. 

Remember that filing for and collecting unemployment benefits is a big help when you’re unemployed. Your credit won’t be affected by your filing, so apply as soon as possible. Unemployment benefits can help you stay on top of your payments (as much as possible) until you find a new job.

And regardless of your employment situation, remember to start practicing good credit habits now. Healthy credit is incredibly beneficial and can help you in times of need throughout your life. Keep an eye on your credit by checking it regularly, and file disputes whenever you find errors. If you need assistance monitoring, reviewing and maintaining your credit, let the credit repair consultants at Lexington Law Firm help. 

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.)