What Happens to Your Credit Score if You Lose Your Job?

Could a job loss cause your credit score to drop?

Losing your job can constitute a major financial blow. This especially holds true if you don't have much money in a savings account to fall back on.

When you lose a job through no fault of your own, you're generally entitled to unemployment benefits. But those benefits may only replace a fraction of your former earnings, leaving you to scramble to cover your bills as you look for a new job.

If you've been laid off, you may be wondering how the loss of your job will impact your credit score. The good news is that being out of work won't directly impact your score, though it could have an indirect effect.

How credit scores are calculated

There are a number of different factors that go into calculating a credit score, including how timely you are with paying your bills and how much of your available credit you're using at once. Your income and employment status actually have no bearing on your credit score. But the loss of your income could create a scenario where your credit score does take a hit.

If you lose your job, you may be at risk of falling behind on your bills. If you miss making payments and you're reported as late to the credit bureaus, your score will take a hit.

Similarly, if you're forced to go without an income (or without the income you're used to living on) for a period of time, you may have no choice but to charge expenses on a credit card and carry a balance while you get back on your feet. The higher your credit card balance is, the more damage your score might sustain. That's because a major factor in calculating your score is your credit utilization ratio, which measures how much of your credit limit you're using at once. The higher that number is, the more your score could drop.

How to protect your credit score if you lose your job

If you've been laid off at work, one of the first things you should do is inquire about severance pay, or try to negotiate some. If that doesn't work (companies aren't required to offer severance), try seeing if you can get paid out for unused vacation or sick days you've accrued.

Then, apply for unemployment benefits immediately. The sooner that money starts coming in, the less likely you'll be to fall behind on your bills.

From there, ask for relief. If you have a mortgage or auto loan you pay every month, contact your loan servicers and ask for leeway on making those payments while you're out of work. You may be given the option to defer some payments or make reduced payments on a temporary basis. That way, you won't risk being reported as delinquent to the credit bureaus.

Losing a job is a tough thing to grapple with -- not just financially, but emotionally, too. The good news is that the loss of your job won't damage your credit score immediately. And if you approach your situation strategically, you might manage to preserve your credit score while you work through the challenge of finding yourself a new job.