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Unemployment can have a far-reaching impact on one’s financial situation. It results in insufficient or lack of income and bills falling behind. This may cause a trickle-down effect on credit scores that’s hard to shake, especially if it increases debt and leaves it unpaid.
If losing your job took a toll on your credit, the good news is rebuilding and improving it is possible. Once you’re back on the clock bringing in a steady income, here are five ways to keep your credit back on track.
Get an Idea of Your New Income
The first step is to get an idea of your monthly income. It helps you come up with a lifestyle you can afford. It also makes you aware of what you can manage to put toward getting your credit back on the right track.
Note whatever amount in your paycheck may not be your actual take-home pay (i.e., earnings
after taxes and other deductions). It can be around 30-40% less than your
gross pay (i.e., earnings
before taxes and other deductions). Ensure to know your
net pay (another term for “take-home pay”) to avoid miscalculations when budgeting.
Update Your Budget
The next step is ensuring that your current budget reflects your income. Prioritize covering your essentials—typically, food, utilities, shelter, and transportation—debt, savings, and emergency funds.
In the meantime, cut out all
unnecessary expenses you can temporarily live without, including streaming subscriptions, pricey lattes, or takeout meals. Keep looking for other ways to cut back, such as lowering your cell phone bill or slashing your grocery budget. If you’re running an extreme deficit, consider downsizing or taking on roommates to offset your spending.
Finally, stick to your budget and keep track of every spending. Doing so helps you to avoid making more debt, which may impact your debt-to-income (DTI) ratio and, eventually, drag down your credit score even more.
Make Timely and Full Payments
Ensure to pay bills and debt on time, in full. Doing so significantly helps in building your credit score. Remember that payment history and credit utilization ratio play a big role in your credit score, specifically
35% and 30%, respectively.
For debts, take inventory of them to let you know which accounts to prioritize first. Jot down your loans, credit card bills, and other liabilities, noting the account status of each. For overdue ones, note their amounts, months past due, collection statuses, and charge-offs.
Get a recent copy of your credit report to know where you stand with your debts better. You can get one free copy of it from each of the three major credit reporting bureaus every year, namely Equifax, Experian, and TransUnion.
Prioritize paying down high-interest debt since they’re the costliest. You can try the “avalanche method,” where you pay minimum across all accounts but pay extra at the one with the highest interest. After it’s paid off, start paying extra with the next highest rate.
Another option is the “debt snowball approach,” where you chip away at the account with the lowest balances instead. While it’s not necessarily the best choice for saving money on interest, it’s a great way to gain momentum and work your way up, especially after being unemployed.
Refinance Liabilities
Consider refinancing other costly debt as well. There are so many
easy loan bad credit options that perfectly fit the financial situations of most recently employed borrowers nowadays. Some examples of these are debt consolidation loans or online personal loans.
Seeking financing does not only help you pay your debts but also helps improve your score. Credit mix makes up 10% of your credit score, so don’t hesitate to rely on borrowing as long as you manage it well.
Practice Responsible Credit Card Use
With a loss of income due to unemployment, you may have temporarily depended on your credit cards to cover your needs. Now that you’re employed, only use them to make essential purchases, but don’t overspend.
Ideally, use no more than 30% of your credit limit and fully pay it monthly—again, the lower, the better. This doesn’t only prevent interest from raking up but also avoids hurting your credit utilization ratio. Remember, keeping this rate low is key to a better credit score.
If you can, avoid credit card dependency at all since it has one of the most expensive interest rates, reaching up to 20% annual percentage rate or higher. While it may be hard, it’s a necessary stepping stone towards rebuilding your credit. If you have difficulty doing so, removing your credit card from one-click shopping websites or freezing it can help.
Final Thoughts
During unemployment, a dip in your credit score may be inevitable but don’t lose hope. Remember that any negative information won’t stay on your credit report forever. With the right budget, well-executed financial management, and patience, your credit alongside your finances will certainly be back to a comfortable place.
