Losing your job can have a far-reaching impact throughout your entire life, but perhaps none more so than your finances.
While being unemployed doesn’t directly impact your credit score, it may do so indirectly. You may have paid bills late or were unable to pay some of them at all. Perhaps you relied too heavily on credit cards. Whatever happened, your credit probably took a hit.
Whether you’ve landed a new job or are still searching for one, the good news is that rebuilding your credit is possible. All you need is a long-term plan, determination and the patience to see it through.
Does filing for unemployment affect your credit score?
Before we launch into how to rebuild credit, we want to clear up some common misinformation regarding unemployment and how it affects your credit.
People often mistakenly think that the mere act of filing for unemployment hurts your credit. Fortunately; this is incorrect. There’s no direct connection between losing your job, filing for unemployment or collecting unemployment.1 It’s the financial ripple effects of unemployment – such as paying bills late or increasing your credit utilization ratio – that can indirectly impact your credit.
Steps to help rebuild your credit
From updating your monthly budget to tackling outstanding debt, here are some simple steps to help you start improving your financial situation and get your credit score back on track.
Update your budget Now that you have regular take-home pay again, it’s time to update your budget to reflect your new income so you can get your finances, and your credit, back in a good place. (If you’re new to budgeting, this handy guide will walk you through how to create a budget for the first time.) Once you subtract your monthly expenses, look for ways to cut back. Things like take out, pricey lattes and streaming subscriptions – especially ones you don’t use – can take a toll on your budget over time. The money you save can be put toward outstanding debt, including those pesky credit card bills.
Stop using credit cards (and start paying them down) Speaking of credit cards, it’s time to stop using them and start paying them down. Losing your job may have forced you to use your credit cards to stay afloat, resulting in an increased credit utilization ratio. Now’s the perfect time to hide those cards and, using your new budget, start chipping away at the balances. These handy tips on how to pay off credit card debt can give you a boost.
Pay your bills on time One of the very best ways to build your credit is also one of the simplest: Pay your bills on time. Failure to do so can do some serious damage to your credit score. (The next time you put off paying a bill remember that once it hits the 90-day delinquency mark, it stays on your credit report a whopping seven years.) We know this can be easier said than done, so we’ve compiled some simple steps on how to pay your monthly bills on time to help you along.
Check your credit report regularly Another simple way to rebuild credit? Start checking your credit report on a regular basis. By federal law, all consumers are entitled to a free credit report from all three major credit bureaus every 12 months. Examining your credit report can show you where you’ve gone wrong so you can start healthy new financial habits. You also may wind up finding errors on your credit report that are bringing your score down. If you do, you’ll need to dispute each error. It’s not a complicated process, so don’t panic if you’ve never done it before. Once you’re ready, this primer on how to correct credit report mistakes can walk you through the process.
Boost your financial IQ A little knowledge goes a long way when it comes to your personal finances. Many lenders offer free financial education on things like budgeting, managing debt, even protecting your identity. A number of these resources are designed to be fast and painless – like these five-minute interactive micro-courses – so you can learn quickly and immediately put the information to use.
You’ve got this.
There’s no doubt about it. Losing your job can wreak havoc on your finances, which can have a trickle-down effect that’s hard to shake. It may feel like an uphill climb, but rebuilding your credit after a period of unemployment is possible. Finding a new job is the first step. Stay positive and committed to your plan. Time will pass and you’ll be back on track.
1 DeMatteo, Megan. “How to protect your credit score if you lose your job.” Cnbc.com. https://www.cnbc.com/select/does-unemployment-affect-credit-score (accessed August 16, 2020).