Getting fired is difficult enough, but having to worry about it potentially affecting your credit score is an additional stressor. A bad credit score hurts your chances of securing affordable lending options which can be a lifeline when you’re unemployed.
This guide will go over everything you need to know about how getting fired from a job can affect your credit score. We’ll also discuss affordable lending solutions that can help you get by when you need cash the most.
Will losing your income impact your credit score?
Getting fired from a job doesn’t directly damage your credit score. Employers will never report your job loss to credit bureaus. So, even if you do lose your main source of income, it won’t show up on your credit report.
Nonetheless, the aftermath of losing your income can have an impact on your credit score in numerous ways. Let’s explore five factors that impact credit scores and how they relate to your employment status!
Five factors that impact credit scores
Your credit score is a number between 350 and 850 that reflects your financial history and ability to repay debt. You can request a free copy of your credit report here.
Credit scores are calculated according to five distinct factors: payment history, credit utilization, length of credit history, credit mix, and new credit accounts. Let’s take a closer look at these five factors.
- Payment history: How often you’ve made on-time payments. Falling behind on payments even once or twice can potentially harm your score.
- Credit utilization: The amount of money you owe compared to your overall credit limit. You can calculate this figure by dividing your total debt by your available credit. Ideally, you’ll want your credit utilization ratio to be below 30%.
- Length of credit history: The age of your credit accounts can affect your score. Older accounts are more favorable than newer ones, so make sure you refrain from closing accounts even if you don’t utilize those credit lines anymore.
- Credit mix: The different types of credit accounts that you have in your name. Ideally, you’ll want a mix of credit cards, student loans, mortgage loans, or auto loans in good standing.
- New credit accounts: Indications that your credit score has been checked by financial institutions recently. Lenders will often perform a hard credit check on your credit report when you apply for a loan. You may find that your credit score dropped as a result. This effect is not permanent, but it can still have a short-term impact.
Lack of income could cause your credit score to plummet
Losing your income streams could jeopardize your ability to pay your bills. If you fail to pay your bills, you could end up falling behind on months of recurring payments.
This could ultimately hurt your credit score in long-lasting ways. Focus on finding other income sources as quickly as possible in order to avoid a possible drop in your credit score.
Applying for emergency financing could hurt your credit score
When you’re strapped for cash, it’s natural to look into emergency financing solutions to help you get by. If you can, apply for a 0% APR credit card to help cover expenses in the short run.
Whatever you do, avoid payday loans. These are high-cost loans that will drain your bank account, put you at risk for a neverending debt cycle, and potentially harm your credit score.
Using a credit card to cover short-term expenses
After getting fired, many people rely on credit cards to cover their short-term expenses. Unfortunately, there are potential pitfalls to this strategy.
For starters, credit cards typically apply high-interest rates that can end up sinking you into debt. Additionally, racking up credit card debt will increase your credit utilization rate, causing your score to drop drastically.
6 ways to secure your finances during job loss
Some people find themselves in the unfortunate position of losing their job. If that applies to you, take advantage of these tips to protect your credit score, finances, and overall peace of mind.
1. Cut back on expenses
When your income source is taken away, it’s critical to cut back on expenses as much as possible. Look for ways to save more money by setting yourself up with a stricter budget.
MoneyLion’s RoarMoney bank account features spending tracking tools that make it easy to monitor how much money you’re spending. Use it to find ways to minimize your expenses while you look for a new job.
2. Create a solid emergency fund
Many people have to face bouts of unemployment from time to time. It’s an unfortunate but common part of many people’s everyday lives.
What’s important is that you plan ahead of time for the worst-case scenario. Do this by creating an emergency fund that will cover your bills for at least three to six months.
An emergency fund will also help you avoid having to take on additional debt in a crisis, which will keep your credit utilization in favorable territory. MoneyLion helps members plan ahead with the new safety net feature, which you can learn more about here.
3. Build investment streams
Investment streams create passive income. This way, even if you’re unemployed, you’ll still be making progress on your financial goals. A MoneyLion investment account offers fully managed portfolios and auto investing without charging any management fees or requiring any minimums.
4. Utilize low-interest credit builder loans
Instead of racking up credit card debt when you need extra funds, consider taking out a low-interest credit builder loan. MoneyLion’s Credit Builder Loan can help you improve your credit score. Plus, you can list unemployment benefits, alimony, or child support as sources of income!
5. Look for ways to earn extra cash
As you apply and interview for new full-time employment positions, know that there are ways you can bring in extra cash in the meantime. Consider selling clothes, electronics, or other items that you don’t need as a way to pay off your bills.
Sites like Vinted, Poshmark, Decluttr, and eBay can be great resources for making money. It’s also worthwhile to consider temporary freelance work opportunities through Uber, Lyft, Seamless, or TaskRabbit.
Use MoneyLion to prepare your finances ahead of a crisis
Getting fired from a job is never easy. But a Safety Net savings account from MoneyLion can help you plan ahead for the worst-case scenario. You can even set up automatic, recurring deposits to make saving easier than ever! Plus, you could access up to $1,000 in 0% APR cash advances per direct deposit period.
Once you are employed again, you might even qualify for early paycheck deposits. Learn more about setting up a Safety Net account with MoneyLion today!
Frequently Asked Questions
Can unemployment affect your credit score?
Unemployment won’t directly affect your credit score. However, the aftermath of losing income can hurt your score.
Is it better to be fired or quit?
It’s better to quit but only if you already have another job lined up. Ultimately, it’s not great to quit or be fired because both scenarios will render you without income.
What happens to your credit score when you lose your job?
Employers don’t report to credit bureaus, so your score won’t be directly affected. However, the longer you go without an income stream, the more likely it is you’ll fall behind on bills or rack up credit card debt, both of which can hurt your score immensely.
