Does Being Unemployed Have an Impact on Your Credit Scores?

Feb
10
2012

This is one of those “yeah, but” articles, which means there could possibly be several answers to the question posed in the title.  The fact that you are not employed does not hurt your credit score.  What can hurt your credit score are your payment history and abuse of credit cards, which can certainly be caused by unemployment.

Payment history

Your payment history is 35 percent of your credit score and impacts your score the most. It is important to pay your credit obligations on time. This can be difficult if you are unemployed.

Most of those that are unemployed have reduced income and are unable to pay their bills in full or on time.   Bills may have to be prioritized with limited income and or resources.  This can lead to bills being paid late, if at all.  Those with underwater mortgages don’t see the purpose to pay something that is worth less than they owe.  They are more concerned about paying for their car, gas, food and utilities.

Using most of your available credit

The amount of your available credit that you use is 30 percent of your credit score and is the second most important item in it.  This is also called credit utilization.  This is the ratio of your total credit card balance compared to your total credit limits.  In other words, the more you owe on your credit cards impacts your score.  The ideal ratio is 20 percent.  For example, if the total amount you owe on your credit cards is $3,000 and your total credit limit is $10,000, you have used 30 percent of your credit (3000/10000 is 30/100 or 30 percent).

Many of the unemployed don’t have enough income or savings to pay their bills and are using their credit cards to pay for the basic necessities. Credit cards are being maxed out just to survive.  Some credit card issuers reduced the credit limits on accounts that were using most of their available credit, which lowered their scores also.

If you continue to pay your bills on time, in full and keep your balances low, your score won’t be impacted. Avoid getting into debt.  If you are unemployed, this may not be possible.

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

 

Comments

  • February 10, 2012

    Hi John,

    You mentioned that “The ideal ratio is 20 percent.” re: utilization. Would that mean that utliziling 20% would yield a higher score than using 10%, for example? My understanding is that the smaller percentage, the better, as long as there is some activity.

    Best
    Chris

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