Unemployment and Credit: What You Need To Know Once You’ve Lost Your Job

Losing your job can be stressful. Millions of people have experienced this during the coronavirus pandemic. If you’ve suffered a job loss, you might have to dip into your savings or use your credit cards more than you’d like to stay on top of things. This may make you wonder if and how being unemployed will affect your credit. This article will outline some primary topics about unemployment and credit so that you can be more informed and make educated decisions that affect you, your family, and your financial well-being.

Filing for Unemployment Insurance Won’t Impact Your Credit Score

Your credit score is an important piece of information that affects your ability to get a new loan from a lender, a higher credit limit from your credit card issuer, or lower interest rates that translate into lower monthly payments. Knowing your credit score and what affects it can help you take steps to ensure that you have good credit.

Your FICO credit score considers five categories of information:

1. Your payment history

2. The amounts of your debts

3. Your length of credit history

4. Your new credit applications

5. The types of credit you have

Notice that filing for unemployment insurance benefits isn’t included in the above list of five factors considered in your FICO credit score. Your employment status doesn’t have any direct impact on your credit score. Your income isn’t even included in your FICO credit score. So filing for unemployment insurance after you’ve lost your job won’t affect your credit score. If you’re eligible for unemployment benefits, you should strongly consider applying for them. Think of them as a financial bridge to your next job. It is protection that you have already contributed to if you are eligible. 

The extra money you receive as part of your unemployment insurance benefits can help you avoid missing monthly payments on your bills. Staying on top of your credit cards and loans while you are unemployed can help keep a bad situation from turning worse.

Income and Employment May Appear on Your Credit Report but Aren’t a Part of Your FICO Credit Score

While income and employment don’t factor into your FICO credit score, they may show up on some credit reports. Some employers want to look at your credit report as part of a background check and to see if you have good credit. This sort of review helps them determine if you are responsible, if you make your monthly minimum payments on time, if your credit utilization ratio is reasonable, if your credit card balances are maxed out, and overall what your credit history is.

There are three major credit bureaus: Experian, Equifax, and TransUnion. Equifax offers a service called “The Work Number,” which sells income and employment history to some lenders and companies. A prospective employer may purchase “The Work Number” on your credit report when they do a background check following your application for a new job to verify your past employment, income, and credit history. But this special report doesn’t include whether or not you’ve made unemployment claims. 

The bottom line is that filing for unemployment doesn’t affect your credit score and lenders or credit card issuers can’t see that you’ve received or applied for unemployment on credit applications.

Some Companies Track Your Google Search History

In between job applications while you’re browsing your favorite websites or taking a quick social media break you may find yourself noticing surprising advertisements that reference your unemployment. How does unemployment affect the ads that you see on the internet?

An increasing number of companies track or purchase Google search history, cookies that appear around the web, and social media data to customize their advertisements and fine-tune them for targeted audiences. Because of this, it’s possible you’ll see ads that offer a new credit card, a new loan, or a refinance to help you with credit card debt or your personal loan while you are unemployed.

When you are applying for new credit you’ll eventually get a decision back from your bank or lender. They don’t always disclose the data that they use in their decisions on credit applications. But, under the Equal Credit Opportunity Act (ECOA), you have the right to receive a letter explaining the reason why you were declined for credit. The lender or credit card issuer does not have to specify further to borrowers about how they chose your interest rate or the credit limit that they gave you on your new account.

You’re Less Likely To Be Approved for New Credit

It may be tempting to apply for a personal loan or a new credit card while you are unemployed to take a little bit of the uncertainty out of the equation and give you a bit of a lifeline. Or you might want to refinance your student loans. But while you are unemployed, you’re less likely to be approved for new credit accounts. That’s because when you apply for any type of loan, the lender will normally ask you about your income.

You can include the money that you receive from unemployment insurance benefits as income. But lenders don’t count on unemployment compensation as much as ordinary income from work because unemployment compensation has an end date while income from your work is ongoing. Lenders cannot discount income that comes from public assistance, provided that the income source is reliable. For example, supplemental Social Security income or Social Security disability income is consistent and doesn’t have an end date, so it can be considered reliable. A potential lender shouldn’t treat that type of income any differently than your job wages.

For many types of loans, including credit cards and home mortgages, lenders are required to evaluate your income and assets. They complete an analysis and mathematical calculations to see if your income and assets are high enough to allow you to repay the loan. It is unlikely that you’ll be approved for a new credit card if your current stated income is $0. Make sure that you are including reliable income from all sources, whether it be public assistance, unemployment insurance benefits, your spouse or partner’s income, or if you have a side hustle that you can count on somewhat consistently.

The same idea generally applies to credit limit increases too. Sometimes people request a credit limit increase when they are unemployed to provide a little bit of a buffer or safety net, just in case. If your current income is $0, you’re less likely to pay back that additional credit limit, so your credit card issuer will likely deny your credit limit increase request.

Let’s Summarize...

Remember that your FICO credit score doesn’t directly depend on your income, your employment status, or whether or not you’ve applied for unemployment insurance. Your credit score is based entirely on your payment history, amount of debt, length of credit history, new credit applications, and the types of credit you have.

If you’re eligible for unemployment insurance benefits, you should apply. Applying for unemployment insurance can actually help you improve your FICO credit score and keep your credit history in good shape. These benefits will make it easier for you to make on-time payments or even pay down some of your debt.

It might be difficult or impossible for you to get new credit accounts while you are unemployed because lenders consider current income when they approve or deny people for loans, credit cards, and other lines of credit. Even if you previously had a high income while you were working, if your income is now $0, you’re unlikely to be approved for new credit.