How to Protect Your Credit and Finances When Unemployed

Losing your job can be a daunting experience, and managing your finances during this period can be even more challenging. However, with a strategic approach, you can navigate this difficult time while maintaining your credit score and financial stability. At O1ne Mortgage, we understand the importance of financial health, and we’re here to help you through every step. Call us at 213-732-3074 for any mortgage service needs.

Does Losing Your Job Affect Your Credit Score?

Contrary to what many might think, losing your job does not directly impact your credit score. Credit scores are derived from information in your credit reports, which do not include employment status or income. However, unemployment can indirectly affect your credit if it leads to missed payments on your bills. Missed payments can significantly harm your credit score, and more severe consequences like loan defaults, collections, and foreclosures can further damage your credit.

How to Protect Your Credit When Unemployed

Maintaining a strong credit score during unemployment requires responsible budgeting and debt management. Here are some strategies to help you protect your credit:

Keep Up With Payments

Your payment history is the most significant factor in your credit score, accounting for about 35% of your FICO® Score. Even one late payment can have a substantial negative impact. Strive to make at least the minimum payments on your credit card bills and ensure timely payments on installment debts like student loans, auto loans, or mortgages.

Avoid New Debt

The total amount of debt you owe is another crucial factor, making up about 30% of your FICO® Score. Avoid taking on new debt by limiting your use of credit cards and other borrowing forms. This not only helps maintain your credit score but also prevents additional interest charges when your income is tight.

Meet With a Credit Counselor

A certified, nonprofit credit counselor can be invaluable when managing debts on a reduced income. They can help you create a budget, prioritize your debts, and make the most of your available funds. If your debts exceed your budget, they can negotiate with creditors on your behalf to set up a debt management plan. While this may impact your credit score, it is less damaging than defaulting on your debts or filing for bankruptcy.

Prioritize Debts

List all your monthly bills, including debts, and rank them by importance. For most, preserving your home will be the top priority, followed by utilities, car loans, student loans, and credit card bills. This ranking helps you allocate your savings and any unemployment benefits effectively. If you need assistance, consider consulting a certified credit counselor.

Consider Seeking Forbearance or Deferment

If you have a federally backed student loan, contact your loan servicer immediately upon becoming unemployed. You may be eligible for loan deferment, which suspends payments and interest accumulation. For other debts, if you have good credit and can demonstrate that your financial difficulties are temporary, you may qualify for forbearance. This temporary arrangement lowers or suspends your monthly payments, but interest charges typically accrue during this period.

Monitor Your Credit

Regularly checking your credit reports and monitoring your credit score can help you manage your debt and maintain your credit health.

How to Make Ends Meet When You’re Unemployed

While your primary focus should be finding new employment, here are some strategies to manage your finances in the meantime:

Collect Unemployment Benefits

Check with your former employer to see if you qualify for unemployment benefits and contact your state labor department to set up payments. Be aware that unemployment benefits will be less than your previous income, so you’ll need to budget accordingly.

Tap Your Emergency Fund

If you have an emergency fund, now is the time to use it. Draw down these funds slowly to keep up with your bills, and replenish the fund as soon as you secure new employment.

Pursue a Side Hustle or Part-Time Work

Consider taking on a side hustle or part-time job to bring in some income while you search for full-time employment. Jobs like rideshare driving, food delivery, or weekend work can provide flexibility and additional funds.

Reduce Expenses

Cutting back on discretionary spending is crucial when your income is reduced. This may involve reducing restaurant meals, travel, entertainment, and recurring expenses like streaming services and gym memberships. Consider adopting a bare-bones budget to minimize extra spending.

Seek Help From Friends or Family

If you’re at risk of falling behind on your debts, consider asking for help from friends or family. A private loan, temporary housing, or other support can help you get through this challenging time.

Consider Shedding Debt

If you’re worried about affording your auto loan or mortgage, it may be wise to consider selling your car or house. While this is a difficult decision, selling on your terms can provide more cash and protect your credit standing. Keep in mind that financing another vehicle or home without income may be challenging, so have a backup plan for your housing and transportation needs.

The Bottom Line

Losing a job can be discouraging, but with prudent budgeting, economizing, and prioritizing your debts, you can get by until you find new work and keep your credit intact. At O1ne Mortgage, we’re here to support you through every step of your financial journey. For any mortgage service needs, call us at 213-732-3074. Checking your FICO® Score from Experian is also a great way to keep track of your credit status as you work toward the next step in your career.