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 lean on.
When you lose a job through no fault of your own, you are usually entitled to unemployment benefits. But these perks may replace only a fraction of your old income, forcing you to scramble to cover your bills while you search 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 not working out won’t have a direct impact on your score, although it can have an indirect effect.
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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 available credit you are using at the same time. Your income and employment status actually do not affect your credit score. But the loss of your income could create a scenario where your credit score suffers.
If you lose your job, you risk falling behind on your bills. If you miss making payments and are reported to be late to the credit bureaus, your score will suffer.
Likewise, if you are forced to go 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 expenses on a credit card and keep a balance while you get back on your feet. The higher your credit card balance, the more damaged your score can be. This is because a major factor in calculating your score is your credit utilization rate, which measures how much of your credit limit you are using at a time. The higher this number, the lower your score could be.
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 pay or try to negotiate it. If that doesn’t work (companies aren’t required to offer severance pay), try to see if you can get paid for any unused vacation or sick days you’ve accumulated.
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, ask for relief. If you have a mortgage or car loan that you pay off monthly, contact your loan officers and ask for leeway to make those payments while you’re out of work. You may have the option of deferring certain payments or making reduced payments on a temporary basis. That way, you won’t risk being reported as a delinquent to the credit bureaus.
Losing a job is difficult to deal with, not only financially, but also emotionally. The good news is that losing your job won’t immediately damage your credit score. And if you approach your situation strategically, you may be successful in preserving your credit score while meeting the challenge of finding yourself a new job.