Before the coronavirus pandemic hit, unemployment rates in the U.S. were below 4%. In April the rate spiked to more than 14%. By November 2020, unemployment dropped to 6.7%, still above the previous level.
If you are one of the many who find themselves unemployed you may feel lost and alone. You are not. More than ever, lenders in all sectors are working to help you not only stay afloat but get through unemployment with your credit intact.
What Is Your Credit Score?
A credit score is a number that depicts your creditworthiness and helps lenders decide if they should give you a loan. Most financial institutions use the FICO® scoring system. FICO is named for the data analytics company Fair Isaac Corporation, which calculates this credit score. Your FICO Score is calculated based on data from the three national credit bureaus. Read on to find out how this number is determined and how you can receive your own FICO Score free.
Does Filing for Unemployment Affect Your Credit?
The good news is that unemployment does not affect your credit score. This is because it is not reported to the credit bureaus and is not included in your credit scores. Not only does it not impact your score but no one can see if you are unemployed. No one has to know but you.
What Does Affect Your Credit Score?
The things that do affect your credit score remain the same whether you are working or not. Following are the biggest influences on your credit score, according to credit bureau Experian.
Do You Pay Your Bills on Time?
How you pay your bills is of no concern to your creditors just as long as they are paid and on time. Your credit score depends on your payment history and is one of the first things reviewed by lenders. Payment history accounts for 35% of your FICO Score. Lenders need to know you’ll pay back what you borrow.
Do You Have Too Much Credit?
Your credit score includes what is called a “credit utilization ratio.” FICO calculates this number by dividing your credit balances by the total of your credit limits. If you max out your cards, lenders consider you a high-risk customer. This weight makes up 30% of your FICO Score. And anyone with a ratio greater than 30% receives a negative report.
Have You Had Credit for a Long Time?
Your score includes your credit length history. This helps lenders understand how well you do carrying credit and paying off debts. Your report shows how long you have had your oldest account, as well as how long ago you opened your newest. This report makes up 15% of your FICO Score.
Do You Have a Mix of Credit?
Just as a diverse portfolio is important when you invest, the same goes with a lender investing in you. They want to see a mixture of credit accounts, not just credit cards. If you have a mortgage, car loan, student loans and other products, you’ll have a better score. This section accounts for 10% of your FICO.
Do You Have New Credit?
If you’ve opened too many cards within the past year it could look like you need the money and aren’t managing your budget. Even too many inquiries for credit can impact this score, which accounts for another 10% of your FICO.
As you can see, 85% of your credit score depends on things you control and have nothing to do with collecting unemployment. Using personal finance software such as Personal Capital or YNAB can help you manage your money and payments when you’re unemployed.
Unemployment Mistakes That Can Affect Your Credit Score
Before I show you what you can do to boost your credit score while unemployed, let’s review what you shouldn’t do.
Don’t Charge Away
When unemployed, it is easy to turn to your credit cards to help out when short on funds. These charges include filling the gas tank, buying groceries, and even paying utility bills. But this is one of the biggest mistakes you can make. Here’s why:
- Increased interest. That $100 you spend on groceries while you are short on funds gets charged interest and becomes more than you meant to spend. Just consider how much you’re paying for those groceries if your interest rate is 22%, for example. And every month you do not pay off that debt, you end up paying even more in interest.
- Increased credit utilization ratio. With a third of your credit score being judged by your credit utilization ratio, spending more using your credit cards when not in a position to pay them down increases your ratio and brings down your credit score.
Further Reading: Best Credit Score Services
Don’t Open New Credit Cards or Take Out a Loan
Hopefully, your unemployment is temporary but don’t open new lines of credit to help you get by while you’re not working. Doing so goes onto your credit report and creditors see you have opened new accounts. Around 25% of your FICO Score relies on your history and the number of new accounts. You could see your score drop.
Don’t Skip Payments
Being unemployed comes with the challenges of surviving on less. And when push comes to shove on what to spend your money on, it’s easy to say an electric bill comes before a credit card payment.
But what may begin as missing one payment could snowball and before you know it you are three months behind and the bills far outstretch your budget. This is when your credit score seriously begins to plunge and calls from collectors begin.
But there is a solution.
How to Boost Your Credit Score While Unemployed
Of course, continuing to make on-time payments on your accounts is the most important way to maintain and boost your credit score. But how does one go about doing this when a steady paycheck isn’t coming in?
Get ahead of your debts to protect your credit score with these benefits available to you:
1. Contact Your Credit Card Companies
You may think your credit card companies don’t want to help but your issuers want to be repaid and will work with you as you go through your hardship. Credit card companies may waive fees, reduce your minimum monthly payment and even temporarily reduce your interest rate. While this may be short term — three to six months — it helps you continue paying your monthly payments and keeps your credit score on the up and up.
Many credit card companies have established hardship relief for those impacted by COVID-19, including the unemployed. Requests for this can often be submitted online.
2. Defer Loans
If you have student loans, postpone making payments using the loan deferment option to keep your loans in good standing. With this feature, you may be able to defer your loans for an entire year. And this means you won’t have to pay each month and won’t be charged a penalty. However, your account still accrues interest. But you can worry about tackling this debt once you are employed again.
Your credit cards may also have options for skipping payments.
3. Get a Forbearance
Mortgage companies offer deferment programs with mortgage forbearance. These are official agreements between you and your lender that your payments will not be deemed delinquent for an agreed-upon length of time and fees will be suspended. This means your lender won’t foreclose and you won’t lose your home.
Mortgage companies are currently required to provide up to one-year forbearance as a result of COVID-19. But the caveat to forbearance is the past-due mortgage payments will be due once the forbearance ends. Yes, freeing up $2,000 each month to pay bills and expenses will go a long way but if your forbearance ends in six months, you will owe $12,000 as a lump sum. Take advantage of forbearance to reduce your payments and continue to pay as much as you can.
4. Stay on Top of Your Credit Report
Even with all of your lenders working with you, sometimes one department doesn’t talk to another and a ding appears on your credit report. Also, the pandemic has resulted in an increase in cyber fraud with a 72% increase (as of December 2020) in payment fraud, including credit card fraud, according to the Association of Certified Fraud Examiners.
Thankfully, all three credit bureaus help you keep an eye on your credit report to spot mistakes. They now offer free credit reports weekly through April 20, 2021. These reports don’t reveal your credit scores but will let you know of any changes being reported to Experian, Equifax, and TransUnion.
Being unemployed is frightening and you may feel you do not have any control. But you do. Remain calm, cut back, and hunker down. Work with your lenders so when you start your new job you can pick up right where you left off.
Written by Lissa Poirot.
View the original article at here.