Your credit score takes into account your past loans, debts, and repayment history. But, it does not indicate whether you are employed or unemployed. Thus, your credit score is not impacted if you lose your job unless you cannot pay all your debts or loans on time. So, the impact is indirect.
Losing your job has a negative impact on your credit score indirectly in the following ways.
#1 You May Fall Short on Your Credit Card Bills or Loan EMIs
When you have lost your job, you cannot always expect to pay your credit card bills or loan EMIs on time. This is because of a sudden drastic loss in income. But, payments due past 30 days will still get reported to the credit bureau. History of payments will make up about 35% of your credit score, and delays naturally impact your credit score in a big way. You can request the lender to defer your payments until your income becomes regular. This will avoid the negative impact on your credit score.
#2 You May Take Out New Loans or Use Up More of Your Credit Limit
When you don’t have a proper source of income, you will end up taking loans or depleting your credit limit to service your current EMIs or credit card bills. This will increase your credit utilization ratio and your debt balance. This will hurt your credit score in turn. Your debt level makes up for 30% of your credit score. Besides this, if your debt levels are high, it will put more stress on your monthly expenditure as you have to pay the debt.
#3 You End Up Opening Multiple New Accounts To Get Money To Pay Your Bills
The credit age makes up about 15% of the credit score. New accounts will lower your credit age, as the credit age is computed as the average age of all accounts.
How To Improve Your Credit Score After Losing Your Job?
It is not really difficult to improve your credit score. You have to inculcate some good financial habits to improve your credit score.
- Paying bills on time: Timely repayment of bills will help you improve your credit score. By doing this, you can improve your credit score over a period of time.
- Reducing your CUR: You can reduce your CUR and your debt to improve your credit score. If you have some savings, you can use them to pre-close smaller loans and save some money on interest also.
- Limit requests for new credit: Each time a request for new credit is made, a hard inquiry will be conducted on your credit report. This will lower the credit score. So, do not apply for any new credit when you have lost your job. Also, you will find it difficult to repay your debt if it piles up.
- Check your credit report for discrepancies: You should get into the habit of checking your credit report every six months or so. Sometimes, transactions may have been entered incorrectly in your report. Or the report may not have been updated timely to show that you have repaid a loan or that you have foreclosed. If you check your credit report, you can immediately get the discrepancies corrected by raising it with one of the credit bureaus.
- Clear Outstanding Payments: If you have some late or outstanding payments on your credit file, it is essential to clear them immediately. Information about late payments and how late they were stays on your file. As time goes by, your credit score will be impacted severely.
How Does Your Credit Score Affect Your Job Search?
Maintaining a good credit score is important even for your job search. While some industries may not consider your credit score as important, some industries like banking, finance etc may require you to have a good credit score.
Some Industries Which Give Importance To Credit Score
- Banking and Finance Sector
A good credit score could go a long way for your employment in the banking and finance sector. Customers in this sector are expected to make their payments on time. So, employers prefer to hire people with a good credit score as they expect employees to have similar financial ethics.
- Jobs with Financial Responsibility
Jobs which hold high financial responsibility require a good credit score although they may not be in the finance sector. For instance, employers do not prefer to hire someone with a low credit score for positions like accounting, credit collection, cashier etc.
- Debts Exceed Salary
If your debt level outmatches your salary, then the employer may decide that you are suitable for the position. This is because a higher debt level will push you towards making more money than the position can offer.
FAQS of How Does Losing A Job Impact Your Credit Score
1:What are the reasons that may cause a sudden dip in your credit score?
The reasons that will cause a sudden dip in your credit score are:
- Applying for a new credit card
- Charging a huge purchase onto your credit card
- Missing a credit card payment
- Paying off your loan
- Closing your credit card
2:In what ways can you enhance your credit score?
- Building your credit file
- Missing your payments
- Catching up on past due accounts
- Paying down revolving account balances.
- Restricting how often you apply for new accounts.
3:What is the quickest way to build your credit score?
Paying bills on time and paying down balances on your credit card are the most effective ways to build your credit score.
4:What is the biggest thing that has an impact on your credit score?
Payment history is the most essential part of your credit score.
5:Does your credit score drop when you lose your job?
Your credit score does not drop just because you lose your job. But, it is possible that your credit history could be impacted if you don’t pay your credit card bills or your loan EMIs. You should contact your lenders if you feel that you are not able to pay your debts on time.