If you’re like many Americans worried about the economy, the prospect of job loss and your credit score is a daunting one. Future employers and lenders can’t tell you’re unemployed just by looking at your credit report, but if you aren’t prepared in the event of a job loss, your credit score will be telling a very unpleasant story. Unfortunately, this can result in a catch-22; employers typically run credit checks on job applicants, but the ones with poor credit (who need the job most) are very likely unemployed.
Your credit score is based on a combination of factors which lenders will use to evaluate your potential risk. While there are different opinions on the efficacy, it’s best to err on the side of caution and educate yourself as much as possible. The goal here is to control as many things as you can and avoid drops in score, along with the prospect of bankruptcy, which trashes your credit and remains visible for ten years. That’s a long time for the past to haunt you, especially if you plan on buying a home or a car in that time. One positive factor is many of the highly weighted components of your credit score are manageable in the event of job loss. By continuing to pay bills on time, not racking up more debt, and not applying for additional credit unless absolutely necessary, your credit score should stay put. If you find yourself in a situation where you may be late on some payments, be proactive and contact your creditors. Given the historic rates of unemployment, most creditors are more than willing to negotiate lower payments or allow you a “grace period”. Often, this prevents a late or overdue payment flag on your credit report, which can result in a major score drop. If you’re at major risk of bankruptcy or creditors refuse to negotiate, check for a counseling service that can negotiate on your behalf. Often this includes consolidating debt payments into one lump monthly fee, which can be a relief after a job loss.
Planning ahead is, of course, the best strategy. While few people expect unemployment due to a layoff, if you’re currently employed, now is the time to build up a cash reserve fund to avoid any unforeseen twists of fate in the future. Financial advisors typically recommend anywhere between two to six months of living expenses in savings, depending on how long it will take you to find a job.
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