How Does Losing A Job Impact Your Credit Score?
Losing a job can increase the chances of defaulting on EMIs, thus, affecting your credit score. Read this article to know more details!
Job loss is tough to deal with as no one really prepares for such a scenario. It is particularly worse if the person to lose the job is the head of a household or the primary breadwinner, or a single parent. The person loses the fixed source of income which creates chaos in the personal and the professional life, and may force the individual to reset priorities.
On the financial front, a job loss can turn upside down an otherwise strong relation with banks and financial institutions. Losing a job and staying unemployed for long adversely affect the credit score of an individual, even though not directly.
What Affects The Credit Score
There are broadly five key factors that affect an individual's credit score: Payment history, level of debt, the age of credit history, types of credit accounts, and inquiries to credit report.
Employment status and salary do not directly impact the credit score. But it does create a vicious cycle of default by the individual on debt and credit card repayments. And this, in turn, affects the credit score.
How Job Loss May Affect Credit ScoreThe credit score is indirectly affected by a job loss and it all depends upon the individual's capacity to handle his credit and bill repayments during unemployment.
> Falling Behind On Credit Card or Loan Repayments:After losing a job, it may get tough to repay the loans on time. This is but natural as the source of income dries up. Payment delays of over 30 days get reported to the credit bureaus and impacts the credit score. Repayment history makes up for 30-35% of the credit score and is the biggest factor influencing it.
> Increasing The Credit Card Balances or Taking New Loans:Without a regular source of income, one may spend more on credit cards or take loans to make ends meet. That creates another problem. Rising credit card balances and high debt amounts can hurt the credit score. The level of debt makes up for 25-30% of the credit score. The more the debt, the higher is the monthly repayment requirements. And that will further strain the ability to make ends meet.
> Opening Several Accounts To Get Money:Opening new accounts can hurt the credit score in two ways. Firstly, it will lower the credit age, which makes up for 15% of the credit score. Secondly, the credit report inquiries make up for 10% of the credit score, and will further bring down the credit score.
> Maintain Credit Score For Job Search:The spillover impact of low credit may even cost a potential job. While employers typically do not conduct a credit check while hiring, a shaky credit history may impact the job searches. However, there are laws that detail the do's and don'ts for employers on credit checks.
Medical debt collections, bankruptcy, foreclosure, repossession, tax liens, and default are other credit-damaging events that could occur during unemployment. These may hurt the credit profile.
There is no substitute for a regular source of income or a job, and a loss of it pushes the individual to focus solely on finding a new job. Simply losing a job does not affect the credit score. But maintaining a decent credit score is pushed down to the lowest on the priority scale.
However, one must try to avoid taking a hit on the credit profile. In the event of a job loss, you should contact the lenders to discuss the options. The lenders may be able to defer payments for a few months until you are able to start regular payments again.