Coronavirus concerns: will less income or job loss hurt your credit score?

Coronavirus concerns: will less income or job loss hurt your credit score?

Coronavirus concerns: will less income or job loss hurt your credit score?

The Coronavirus crisis is wreaking havoc on the livelihoods of millions of people around the country and the world at large. In the United States, close to 10 million American workers—a record-breaking number—filed unemployment claims in the last two weeks of March 2020.

Amidst the turmoil, it’s understandable that people are wondering how less income or joblessness may affect their credit. A recent Zest AI survey conducted by the Harris Poll reveals that 69% of Americans think their level of income has an impact on their credit scores.

If you’re among those who are worried, then the facts may comfort you. Although an income reduction could certainly have an indirect effect on your credit, losing your job or bringing home less money will not, in and of itself, harm your credit score in any way.

How Income and Employment Factor Into Your Credit Score

Credit-related questions can be complex. Quite often there are no simple answers. If you’re wondering how a specific action will impact your credit score, the answer may be an ambiguous and frustrating, “it depends.”

One reason for the ambiguity is because credit actions can impact the credit scores of different people in different ways. A new negative entry on your credit report might result in a  20 point drop in your credit score. Meanwhile, the same negative entry could cut 40 points from another person’s total score. As a result, it’s no wonder that credit myths abound.

Yet sometimes, the answer to a credit-related question is crystal clear. Such is the case when it comes to income, employment status and your credit score. Credit scoring models do not consider this information when calculating your credit score.

Why Scoring Models Ignore Income and Employment

Credit scoring models, like FICO and VantageScore, consider information that appears on your credit report—nothing more and nothing less. If you haven’t checked your credit reports lately from all three credit bureaus, you may be able to claim free reports from AnnualCreditReport.com. Consumers are entitled to a free credit report from each credit bureau (Equifax, TransUnion, and Experian) once every 12 months.

After you download your credit reports, look them over. You’ll notice that they don’t contain data that pertains to your income. You may find a list of current or former employers on your reports, but you won’t find your current employment status.

Because income metrics and employment statuses are absent from credit reports, credit scoring models ignore them. If an item doesn’t show up on your credit report, it’s irrelevant from a credit scoring perspective.

Furthermore, if income was included on your credit report, it might not affect your credit score as much as you expect. The Federal Reserve released a study in 2018 revealing that income isn’t a strong predictor of credit scores. The study shows that consumers with higher incomes don’t automatically manage their credit in a way that leads to higher credit scores, nor vice versa.

Credit scores measure the risk that a person will become 90 days or more late on a credit obligation during the next 24 months. Earning more money doesn’t automatically make you  a good credit risk. Even people with high incomes can have low credit scores if they practice poor credit management habits, like paying bills late or running up high credit utilization ratios on credit cards.

Steps to Take If You Can’t Afford to Pay Your Bills

It’s true that an income reduction or job loss won’t directly affect your credit score. But it would be naive to pretend that suddenly earning less money doesn’t pose a threat to your credit. Reduced income can lead to trouble keeping up with your bills, especially if you already had a high debt-to-income ratio.

With FICO credit scoring models, 35% of your credit score is based on your payment history. So, if you do fall behind on financial obligations, the credit score consequences can potentially be severe.

Are you worried you won’t be able to pay your credit obligations due to the Coronavirus crisis? Here are some tips that might help you.

If You Need Unemployment Benefits, File for Them ASAP

If you lose your job thanks to the COVID-19 pandemic and can’t find a replacement right away, it’s important to file for unemployment benefits ASAP. Often, it can take a few weeks for your first unemployment check to arrive from your state’s unemployment insurance program. So, the sooner you file, the better, especially with many other people applying for unemployment during this time.

On the bright side, the $2 trillion Coronavirus stimulus package, known as the CARES Act, has expanded unemployment benefits. Unemployed workers will receive an extra $600 per week from the federal government on top of regular state unemployment benefits. Additionally, the CARES Act allows self-employed workers, gig workers and freelancers to file for unemployment benefits—three groups that do not traditionally qualify.

Create a New Budget

When your income changes, whether it’s from a reduction in hours or because you filed for unemployment benefits, you will need to make changes to your budget. If you’re bringing home less money than you were before, it’s essential to make spending cuts.

Lowering your expenses could be a smart move even if your income hasn’t changed. You can use any funds you free up to start or grow an emergency fund that can help you better prepare for future uncertainties.

Research New Income Opportunities and Relief Options

One of the best ways to address an income shortfall is to find other options to inject extra cash back into your budget. Although many businesses are currently downsizing or shuttering altogether, there are a number of industries in desperate need of workers during the pandemic. Here’s a guide to help you find companies that are still hiring in the midst of COVID-19.

There are also a number of relief options available, courtesy of the federal government and other organizations. For example, the federal government will soon be sending out stimulus checks to millions of Americans, courtesy of the CARES Act. Small business owners, self proprietors, and contract workers may also be able to take advantage of other provisions in the CARES Act that could help them stay financially afloat.

Ask Your Lender for an Accommodation

If you’re at your wits’ end and can’t find a way to keep up with all of your bills during the pandemic, your lender may be willing to help. Lenders and creditors from a variety of industries are stepping up to offer relief, such as:

It’s best to contact the companies you do business with before you miss a payment. In the case of federal student loans and federally-backed mortgages, relief options are built into the CARES Act. However, you may still need to contact your lender to request to activate relief options, like payment deferment. With other banks, credit card issuers and lenders, you will need to reach out proactively to see what types of hardship options may be available.

The CARES Act also includes language that temporarily amends the Fair Credit Reporting Act (FCRA). If you reach an accommodation with your lender during the pandemic, the lender must continue to report your account as current to the credit reporting agencies (assuming you weren’t already past-due on your payments).

Other Ways Income and Employment Status Can Affect You

You probably don’t work hard to maintain a good credit score just for bragging rights. A solid credit rating matters because of the impact your credit can have on your overall financial wellbeing.

A good credit score can make it easier to qualify for new loans and credit cards when you need them. Clean credit reports might give you an edge when you apply for a new job or promotion. Higher scores may also save you money by helping you secure lower interest rates and even insurance premium discounts.

Of course, your credit isn’t the only factor that lenders consider. When you apply for financing, lenders will evaluate both your creditworthiness and your capacity. Creditworthiness measures the likelihood that you’ll make your payments on time. Capacity tells lenders whether you can afford the financing you’re seeking, based on your income and debt obligations.

Even with stellar credit scores, your application might be denied if a lender doesn’t feel confident that you can afford the loan or credit card.

Surviving the Crisis

Losing your job, even if you did nothing wrong, can be an emotional and stressful experience. Yet bad credit doesn’t have to be a side effect of unemployment or income reduction during the COVID-19 pandemic. As long as you proactively communicate with your creditors and you’re careful with the money you do have (unemployment benefits, stimulus check, emergency fund, etc.), it is possible to emerge on the other side of this storm with a good credit rating still intact.

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