How Unemployment Affects Credit Scores

Credit score is a measure of one’s financial health at a specific point in time. The lenders make use of this score to determine the risk posed by a particular consumer when they lend for different purposes. When the consumer has a bad credit score and presents a higher credit risk, lending agencies are reluctant to issue credit to such consumers or issues credit with a higher interest rate than for the other consumers with a better credit.

When a person loses his or her job and lives on unemployment benefit, many would think that it can affect the persons credit score badly. However, experts point out that, neither being unemployed affect the credit score directly nor it appears on the credit report. Nevertheless, unemployment can affect the credit score indirectly and this article hopes to unravel these instances one by one.

What affects the credit score?

When considering the factors that can affect the credit score of a person, there are several significant events that need to be considered. These include, defaulting on payments of any type of credit, failure to settle bills on time, filing for bankruptcy, being considered for debt relief on request or else foreclosure of one’s home by a lending institute. When such factors reduce the credit score beyond a certain limit, it may be difficult for a person to obtain credit although he or she can build the credit score gradually by adhering to better financial practices.

What are the indirect effects of unemployment on the credit score?

During the period of being unemployed, the person may not receive adequate amount of money even through unemployment benefits, in order to settle the monthly bills and other expenses. This may force the unemployed person to obtain more credit although he or she may not even be able to pay the minimum amounts due on time.

When bills are not paid on time, especially credit card bills and loan installments, they can accumulate further. At the same time, the credit card companies might charge a higher interest rate to future credit requests or for the credit already obtained by the consumer through their credit cards. Thus, the added financial charges for late payments as well as the higher interest rates could worsen the person’s ability to settle these bills, and such defaulting can further reduce the credit score drastically.

At the same time, unemployment can lead to a person filing for bankruptcy which itself can badly affect the persons credit score and shall appear in his or her credit report. Such remarks can last for at least 10 years as against some of the other bad credit remarks, which can disappear within a shorter period. Similarly, a foreclosure made by the bank on the person’s house could also affect the credit score significantly although such remarks will only last for 7 years.

What is the conclusion?

Thus, the unemployment filing per say neither would affect the persons credit score nor it would appear on the credit history. However, the consequences of such layoffs can affect the person’s ability to settle debt and therefore could affect the credit scores indirectly.