How Losing a Job Can Impact Your Credit Score?
Losing a job can be a devastating event and one nobody prepares you for. It can affect all aspects of your life adversely, especially if you are the sole breadwinner of your family. An unexpected layoff can create chaos in your personal as well as professional life, forcing you to reset your priorities and come up with future plans. You might also have to re-evaluate your spending habits and adjust your lifestyle until you can gain financial independence and employment again.
While it’s natural for you to focus almost exclusively on finding a new job, there is an often-neglected impact of losing your job that you must take into account as well. Not many people are aware of the fact that losing a job and long periods of unemployment can detrimentally impact your credit score. Just to clarify, your credit score takes into account your past loans and debts, as well as repayment history, but it does not show whether you are employed or unemployed. Thus, your credit score is not impacted by job loss until you can pay all your debts or loans on time.
Credit scores are compiled by one of the four major credit scoring agencies in India: CIBIL, Experian PLC, Equifax Inc, and HighMark Federal Credit Union. When creating your credit report, these agencies include your loan and credit card information for the past seven years. Although your report doesn’t contain any record of employment status, work history or personal income, the truth is that losing a job can increase the chances of defaulting on EMIs, and thus, lowering the credit score.
How to improve credit score after a job loss?
Improving your credit score is not as difficult as it might seem. It may take some time; however, you can improve it by being responsible and developing good financial habits. Here are a few things that you must do to improve your credit score, particularly if you have just lost a job:
Paying bills on time
By paying your bills on time, you can improve your credit score slowly, but surely. Repayment history is an integral part of your credit score. If you start paying your bills on time each month, you can improve your credit score over some time.
Reducing your debt
You can reduce your credit card debt and lower your credit utilization ratio to boost your credit score. If you have some savings, use them to foreclose smaller loans and save some money on interest as well.
Limit new credit requests
New requests stay in your file for almost two years, but their impact reduces over time. So, make sure to limit the number of times you make hard inquiries for new credit. If you know you won’t be able to repay a loan without a stable job, don’t apply for one.
Check your credit report for inaccuracies
It is vital to monitor your credit report periodically as errors can creep in. Furthermore, sometimes the report isn’t updated timely to reflect that you have repaid a loan or that you have foreclosed. As a thumb rule, check your credit score and report every six months or so.
Clear outstanding payments
In case you have some outstanding payments on credit cards or debt instruments, it is essential to clear them up to improve your credit score. Late payment information stays in your credit file, as well as how late the payment was. As more time lapses, your credit score gets affected adversely.
It is vital to keep your credit score high even if you lose your job. Since several companies perform credit checks as part of the hiring process, poor credit history can cause you to lose out on potential jobs, so ensure that you pay all your bills on time and improve your credit score. Losing your job is tough as it is, and while you must focus on gaining employment, do your best to keep your credit score high so that you can land your next job easily.