Damage to Credit From Being on Unemployment

Unemployment is a primary cause of poor credit, but the impact isnt the same for everyone. People who are prepared for a job layoff or termination may suffer no damage to their credit. Others who were already struggling financially may find themselves facing auto repossession or foreclosure within a few months of losing their jobs.

Unemployment Benefits

Many people who lose their jobs through no fault of their own are eligible for state unemployment benefits. Initial eligibility is usually for 26 weeks, with payments lasting for more than a year with extensions, in some instances. However, the weekly payments may be small compared with the salary the person earned while working. The benefits are enough to buy groceries and other necessities, but usually not enough to pay all bills and obligations.

Credit Reports

Unemployment benefits are not reported to major credit reporting bureaus such as TransUnion, Equifax and Experian. Because of that, periods of unemployment are not noted on credit reports. That means the act of applying for and receiving unemployment benefits does not damage credit. Problems begin only if the debtor cannot pay bills because of the unemployment. People who have several months take-home pay in the bank may never miss a payment during unemployment and suffer no damage to their credit score. Others not as well-prepared may see their scores plummet, with two or three years necessary for rebuilding their credit once they return to work.

Scores

Credit scores are three-digit numbers ranging from 300 to 850, with scores of 720 or higher most favorable. Scores of 720 or higher usually lead to the lowest interest rates on credit cards and loans. A person missing payments while suffering from unemployment will find it impossible to maintain a 720 or higher credit score. People with scores in that range usually never miss payments.

Extreme Debt

Long-term unemployment can cause a variety of credit problems, including charge-offs, collection accounts, court judgments and even bankruptcy. Charge-offs are accounts closed by the creditor because of missed payments. Collection accounts are credit accounts assigned or sold to debt collectors. A court judgment is a legal order in civil court demanding that a debtor pay a debt. If the debtor cannot pay the debt, the party filing suit can request bank or wage garnishment. Some unemployed people facing multiple garnishments and debt lawsuits file for bankruptcy. Bankruptcy remains on credit reports for 10 years, but allows participants to reorganize or eliminate debt.