Does Filing for Unemployment Affect Your Credit Score?
Updated: May 20
Unemployment can be a scary situation for anyone, especially because it gives very few certainties about the future--including your credit score. While you can receive disbursements from the government, they are not a free pass from worrying about loans, debt, and credit card reimbursements.
While you may find that there is good news regarding the direct relationship between unemployment and your score, there are some negative indirect impacts that may motivate you to avoid filing.
Can Unemployment Directly Affect Credit Score?
While unemployment can affect the daily routine of your life, it, fortunately, does not affect your credit score directly. With that being said, credit bureaus or future lenders cannot see if you have collected unemployment benefits at any point. However, unemployment can impact your credit score indirectly through new spending habits that must be adjusted while not having an income.
Is Collecting Unemployment Bad for Credit?
If you are in the situation, collecting unemployment could be the best financial decision. This still poses some concern as the word "unemployment" does not necessarily have the most positive connotation. The most important thing you need to know is that lenders cannot see that you lack or have lacked employment.
On the other hand, unemployment can affect your credit score or your credit report because the lack of income can make payments difficult to pay. As a result, while lenders do not know if you are unemployed, your employment status could lead to difficulty paying off debt and therefore having an impact on your credit.
Does My Credit Report List Unemployment?
A credit report does not list your employment status, even if you do not have a current job. It has no direct impact on your payment history, credit card balances, or account balances. However, lack of an income makes it more difficult to pay off credit cards and any other debt.
How Can Unemployment Influence My Credit Score?
As mentioned before, employment status does not appear on your credit report nor does it have a direct impact on your credit score. However, losing a job and an income can indirectly influence the timeliness of your payments and the total amount of money paid. Filing for unemployment can also make you feel the involuntary need to apply for new credit.
Urge to Apply for New Credit
With the absence of a steady stream of financial support, you may have the urge to apply for new credit. When you open up new accounts and accumulate more debt, you can inadvertently hurt your credit score. Additionally, while new credit does not have the same impact as credit utilization on your score, it can still hurt your overall credit reports.
Even though you do not have to disclose your employment status to lenders in the future, if you take out more loans or apply for more financial credit, they can notice that you were at one point in a situation related to financial hardship. They may even be able to figure out that you were unemployed, which could influence their decision over whether to grant you credit.
If you must apply for a new credit card (or multiple), be sure to do so wisely and with caution, making sure that you can make payments on time. However, it is best to start first by budgeting your unemployment benefits, limiting your spending, and maybe dipping into some savings.
May Prompt Late Payments
While unemployment does not get listed on your credit history, the lack of sufficient financial revenue can lead you to late payments. It is no secret that bills can stack up, especially without proper compensation, and interest is always something to consider. So, while credit bureaus cannot tell that you do not have a job, debt can start to accumulate when you do not have one and impact your credit scores.
Can Lead to Slip-Ups in Overspending
Though unemployment gives you some survivable compensation, it most likely does not amass the value that your previous employers were providing. As bills grow in quantity and take more money out of your earnings, you may start overspending. When your payment amounts become larger, credit cards seem like a way out. The truth is that this can impact your credit score overall.
What Are the Disadvantages of Filing for Unemployment?
The chances are that you do not want to be in a position where you must collect financial compensation because you do not have a job. While your personal information about employment does not appear on public record, filing for unemployment is a difficult situation.
The Burden of Finding another Job
Of course, when you do not have the financial benefit of a steady salary, there is always pressure to find one. Additionally, the office that oversees your status is very involved with the process of you finding a new source of revenue payment. Plus, your compensation can significantly decrease if you refuse an offered position that does not pay as much as your previous employer.
The amount of money you receive from the government gets determined by the state you live in. If you work part-time or employ yourself, then you could receive fewer benefits from unemployment. Ultimately, this can lead to higher bills and more loans in your account.
Even while collecting an unemployment income, you cannot avoid government taxes. You can get the cash you need to make payments on bills and other necessary things, but this spending amount is always less after taxes. It's annoying but necessary. Plus, you need to make sure that your government-related revenue gets reported to the IRS during tax season.
Since payments come from the government, the process of you receiving the spending check can take a while. As a result, due dates can make paying back a loan more difficult, affecting your credit report and potentially your credit history.
How to Protect Your Credit Score While Unemployed
Despite not having a steady salary coming in from work, you can still protect your credit by being mindful about credit cards and your credit report. Even though credit bureaus cannot see from public record if you have ever lacked a job, they can probably tell from credit card status and loan history. It may be beneficial to understand how student loans affect your credit score as well.
Understand Your Current Credit
Request a copy of your credit report from each of the credit bureaus. You can obtain it for free each year--but only one. If you have already requested your credit report the same year, it is not going to be free.
When you see all your credit card and score information, it can be easier to understand where you stand financially. From there, you can make a more mindful decision about credit utilization and applying for new credit cards.
Relying on a credit card during uncertain times seems like the most logical. However, you eventually need to reimburse those credit cards, and when there is financial uncertainty in your accounts, this may not be the best thing.
To prevent yourself from spending too much on your credit card or other credit services, try using cash instead. It may indirectly impact your score, but it takes more time to do so. Plus, having the physical bills appear in your hand helps budget better.
Pay the Minimums
It is a great feeling when you can pay off credit services faster than expected. However, uncertain times can be a stick in the mud and keep you from doing this. There is nothing wrong with simply paying the minimum fees on accounts. Going overboard can lead to taking out another credit card, thus affecting your entire score. Until you can get a steady salary, try to hit the minimums.
Don't Apply for New Credit
A new credit card can seem like an article of salvation in financially uncertain times. To protect your score, experts recommend avoiding applying for new ones, as they can really hurt your score. While it can be troubling and difficult, avoiding this can save you from more monetary burdens in the future.
Should You Avoid Reporting Unemployment?
The answer ultimately comes down to you and your current economic situation. If you know you are getting a steady salary from a new position soon, there is no reason to receive support from the government. You should do your best to avoid this, though, as it can take a toll on your economic situation and lead you toward a concerning path.
The Final Word
When you live in a financially uncertain situation, you can often feel worrisome about its effects on your life and your future. The good news is that unemployment does not directly influence your credit or your credit score. Although, it can inadvertently impact the way you hit your payments and when you can reimburse your debt. Ultimately, some resources can help you with these difficult times. You can find that different card issuers offer assistance and others may not even have late fees.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, LTD., a registered investment advisor. Stratos Wealth Partners, LRD. The Kelley Financial Group, LLC are separate entities from LPL Financial.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The content is developed from sources believed to be providing accurate information.
No investment strategy assures a profit or protects against loss.
Investing in mutual funds involves risk, including possible loss of principle. Fund Value will fluctuate with market conditions and it may not achieve its investment objective.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawal prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% penalty tax. Limitations and restrictions may apply.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investors yield may differ from the advertised yield.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate or return and fixed principal value.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.