Does Losing Your Job Affect Your Credit?

Losing your job may cause stress about how you will pay bills, but it does not directly affect your credit score. However, like nearly anything in the credit scoring industry, losing a job could have ripple effects that drag down your credit score. By contacting lenders early, you can avoid most of these negatives listings in your credit report

Identification

The credit reporting agencies -- Equifax, Experian and TransUnion -- do not consider employment status or salary when they calculate your score, according to John Ulzheimer of MintLife. Including salary and other employment-related data stopped during the 1980s, because of the difficulty in verifying this information.

Potential Effects

Lenders consider more than a just a FICO credit score when deciding whether to extend credit. Losing a job could indicate an unstable life or an inability to service a debt. Also, monthly debt-to-income ratio is valued in the credit industry. Unless you have additional income, your debt-to-income ratio after a job loss may rise beyond the acceptable level -- most lenders want a ratio of 36 percent or less, according to Experian -- and lenders probably will reject your application.

Considerations

Living without an income could damage your score if it results in you being unable to meet your monthly debt obligations. Items such as missed payments or defaulting on an account can destroy your credit score for years to come. If you apply for several loans to make up for an income shortfall, the credit score model deducts a few points from your score for each inquiry and more for adding overall debt to your profile.

Tip

Call your lender as soon as you believe you might become delinquent on your debt payments. Most lenders will try to help you, such as offering to defer payments a few months, if it means the lender can avoid you declaring bankruptcy. In a worst-case scenario, you typically can negotiate to pay a part of the balance and settle the account. Debt settlement, however, is a major negative item on a credit report, but it might be better than bankruptcy.