A sudden loss of job is a very stressful event especially if one is the sole breadwinner of the family. All your financial plans and dreams suddenly grind to a halt. Uncertainty about the future and anxiety about how you will handle your expenses and pay off your debts bogs you down. In fact it can be quite overwhelming to think about the consequences of not meeting your financial commitments in time. Will unemployment affect your credit score? Let’s explore.
The fact that you are unemployed does not show up on your credit report. The credit bureaus do not factor in your employment status during the credit score calculation. Hence losing one’s job does not directly affect one’s credit score. But if you fall behind on your EMIs and credit card payments because of loss of income, it is sure to have a negative effect on your credit profile. Payments over 30 days late get reported to the bureaus and lower your score.
It all boils down to how you tackle the situation and deal with your debts during the period of unemployment. By being proactive you can ensure that your credit rating is protected even during this hardship. Here are a few important things that you should consider to deal with the situation.
Dip into your emergency fund- If you’ve saved enough money to cover for at least 6 months of your monthly expenses, then you need not worry too much. These funds are meant for such situations, as they help you stay on top of your payments while you search for a new job. But if the savings are not enough to cover your bills do not turn to credit cards, loans or cash advances to make ends meet. High interests on credit card balances and debt amounts will put additional strain on your finances and damage your credit score. Opening new loan accounts will reduce the average age of accounts and bring your score down.
Instead take the following steps. Not only will it help in avoiding the credit score plummeting but will help you improve CIBIL score.
Make a budget- The budget you made while you were employed won’t fit the current circumstances. Once you lose your primary source of income you need to cut down on unnecessary expenses. Eliminate all the spending that you can do without, and rework your budget. For example postponing holidays, cancelling subscriptions, cutting down on movies, dinner outings and salon visits will free up some extra cash and give you some breathing room while you figure out how to meet your debt payments. Factor in alternate sources of income like your spouse’s income, emergency funds, severance or part time income that you can rely on during this period.
Balance transfer- Consider transferring your credit card balance to a new card with an introductory offer of 0% APR. By paying no interest on your balance you can save a significant amount. Resist the urge to continue spending on credit cards. Start paying for your expenses by cash. This way you will be more disciplined in the way you spend.
Prioritize your debts- If you still fall short then you need to prioritize your debts. Figure out which debts are most important for you to service. Secured loans where you run the risk of losing your asset on non-payment should be the top priority. Unsecured loans, credit card bills can be lower priority debts. You can conserve your cash by making only the minimum payment on the credit card. Though rolling over balances will attract high interest charges sometimes you have to make tough choices to avoid defaults. Make sure you do not miss any payment and pay at least the minimum amount on time. If you delay or fall behind your payment, your credit score will be impacted.
Talk to your lenders- If you have a budget shortfall, defaulting on payments is not the only option. Remember, if your account goes into collections your credit score will take a serious hit. So it is always better to talk to your lenders and openly explain them about your financial difficulties. Express your desire to meet the obligations and ask them if they have any financial hardship programs. At times lenders agree to lower interest rates or set up more affordable repayment plans during the period of unemployment. You may even request for forbearance which will allow you to defer the payment schedule for a set period of time. Suspending payments will give you more room in your budget while you look for a new job.
Dealing with debt and maintaining your credit score is tough when you are out of job, but not impossible. Adjust your budget, talk to your lenders, use your emergency funds and resist the temptation of new debt. Careful planning and re-evaluation of goals will help you sail through this period.