When an individual loses their job and becomes unemployed, there is an indirect affect that can be seen with their credit score. Losing a job is stressful and particularly damaging when monthly payments still need to be made for various expenses. Individuals that are laid off from their job will also suffer from a similar problem.
Income reduction
The direct result of losing a job from layoffs or being let go is the reduction of income. Reduction of an income level puts stress on finances. This stress will affect your financial profile and credit score if you fail to pay any of your bills on time. Your credit score will drop when a payment for any loan type. The type of loan that you make payments on includes a car loan, a mortgage and credit cards. The Business Exchange suggests building an emergency fund to reduce credit difficulties in times like these.
Income levels
When an individual is unemployed, they do not meet requirements to receive a loan. This results from a borrower that does not have the income level required to make payments. Preventing credit scores from dropping requires making all of your required payments. This can be achieved temporarily when a fund is set aside for emergencies. This allows you to continue to make payments and prevent the dropping of your credit score to unacceptable levels.
Lines of credit
Another factor that can negatively affect your credit score is requesting additional lines of credit. If you know that you may lose your job, applying for an additional credit card can provide you a line or credit to use. However, each time you apply for a credit card the lender will check your credit report. Each hit on your credit report will cause your credit score to go down. You will need to keep this in mind for the future if you were to become unemployed.
Outstanding balances
An additional factor that affects credit scores in a negative way are outstanding balances according to Experian. This results from the use of credit cards in lieu of electronic payments from a saving or checking account. When you max out a credit card, your credit score will decline. The outstanding balance for a credit card account needs to be below 50 percent to prevent a decline in your credit score.
Additional Information
Keeping your payment history in good standing will ensure that you do not see any type of drop in your credit score. Making payments on time or in full for a consistent period of time has positive effects on a credit score.