Credit score

What happens to your credit score if you lose your job?

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Could a job loss cause your credit score to plummet?


Key points

  • Losing your job does not directly affect your credit score.
  • The financial side effects of losing your job could hurt your credit score.

Losing your job can be a financial blow. This is especially true if you don’t have a lot of money in a savings account to fall back on.

When you lose a job through no fault of your own, you are usually entitled to unemployment benefits. But those perks can only replace a fraction of your old earnings, leaving you scrambling to cover your bills when looking for a new job.

If you’ve been laid off, you may be wondering what impact losing your job will have on your credit score. The good news is that being out of work won’t directly impact your score, although it may have an indirect effect.

How credit scores are calculated

There are a number of different factors that go into calculating a credit score, including how quickly you pay your bills and how much of your available credit you are using at the same time. Your income and employment status don’t actually affect your credit score. But losing your income could create a scenario where your credit score takes a hit.

If you lose your job, you risk falling behind on your bills. If you fail to make payments and are reported late at credit bureausyour score will take a hit.

Likewise, if you are forced to live without income (or without the income you are used to living on) for a period of time, you may have no choice but to charge the expenses to a card. credit and carry over the balance while you get back on your feet. The higher your credit card balance, the more damage your score could take. Indeed, a major factor in calculating your score is your credit utilization rate, which measures how much of your credit limit you are using at one time. The higher this number, the more your score could drop.

How to protect your credit score if you lose your job

If you’ve been laid off at work, one of the first things you should do is find out about severance packages or try to negotiate some. If that doesn’t work (companies aren’t required to offer severance pay), try to see if you can get paid for unused vacation or sick days you’ve accrued.

Then immediately apply for unemployment benefits. The sooner that money starts coming in, the less likely you are to fall behind on your bills.

From there, call for help. If you have a mortgage or car loan that you pay monthly, contact your loan officers and ask for flexibility to make those payments while you’re away from work. You may have the option to defer certain payments or make temporarily reduced payments. This way, you are not at risk of being reported as a delinquent to the credit bureaus.

Losing a job is a tough thing to deal with, not just financially, but also emotionally. The good news is that losing your job won’t immediately affect your credit score. And if you approach your situation strategically, you may be able to preserve your credit score as you face the challenge of finding a new job.

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