How Does Disability Affect Credit?

As many as 20 percent of citizens in the U.S. have some sort of disability, according to the World Bank. If you ever experience a disability, even just for a short period, you could wreck your credit score for years. Thus you should always prepare for the worst, because disability insurance coverage through an employer may not be enough to pay for your expenses.

Identification

Disability's most prominent effect on credit is the reduction in the ability of the borrower to pay his bills due to lost income. If your disability coverage fails to cover your monthly expenses and debt repayment obligations, your credit score will drop due to missed payments. Missed payments and delinquent debts hurt your credit score for seven years. When you have to declare bankruptcy, you score is damaged for up to 10 years. Unpaid tax debts can stay on your credit forever.

Considerations

Employers often offer short-term disability insurance or "sick leave. Also, states have workers compensation programs employers must use if they do not have private plans. In all, you generally need about 60 percent of your income to survive while on disability. When disability insurance covers your needs, it may not offer long-term benefits -- most insurance plans have a limit of three to five years.

Solutions

Apply for Social Security disability benefits immediately, because it might take several months before you receive your first benefits. Also, open up a bank account just for your SSDI benefits just in case you default on loans and the creditor gets a wage garnishment. Creditors cannot touch SSDI payments, but they might be able to go after an account that mixes several types of income with SSDI benefits. Taking out new lines of credit could be a wise move if you have a short-term disability and you have no other sources of income. New lines of credit ding your credit score but are a much better alternative to missing payments.

Warning

Check the tax rules on any of your disability benefits. The IRS taxes most employee-sponsored and government plans. A insurance plan that covers 60 percent of your previous income, for example, might have an effective reimbursement rate of 40 percent after taxes. Also, reveal all types of potential insurance benefits to any pertinent party so you do not collect more in disability benefits that your normal wage, which is considered fraud.