How to Protect Your Credit During Umployment

An unemployed man contemplates how to protect his credit
© Image Source RF/Cadalpe / Image Source / Getty

Losing your job is one of the worst things that could happen, especially in a period when hiring is slow. With the right tools, you can make it through an employment slump, keeping your credit in tact.

When you're job searching, you don't want to worry about anything else, least of all your credit. But, your credit will could play a significant role in making your next career move. Many employers use your credit history as one of the hiring factors.

If you let your credit go after losing your job, your next potential employer might pass you over because your credit problems.

Figure out how you’re going to pay your bills. Possibilities include your emergency fund, unemployment benefits, severance, part-time work, a spouse’s income, or something else. Whatever the income source, you need to have a plan.

If you decide to apply for unemployment, make your claim for unemployment as quickly as possible. Alison Doyle, expert to Job Searching says you might be able to file for unemployment online or over the phone. Unemployment benefits will only be a fraction of your previous pay and the amount isn’t based on your financial need, but it’s better than nothing. Don’t depend on unemployment benefits to support all your expenses. The goal is to use unemployment and any savings to cover your necessary expenses until you get a new job.

Use your emergency fund to bridge the gap between your unemployment benefits and severance pay (if any).

Use these funds sparingly because you don't know how long you'll need it.

If it's taking you longer than expected to get a full-time job, consider working part-time. Or, you can make money from a hobby, sell arts and crafts on Etsy, or start a (low-cost) business of your own.

Create a new budget. Your old budget – the one based on your old income – won’t fit your current circumstances.

To get a better idea of what it takes to survive during unemployment, you need a new budget based on whatever income you have, even if it’s savings.

Cut back on your spending, way back, even if it means disconnecting some services and cooking beans (dry beans are little cheaper than canned) and rice for dinner (not Minute rice). Stop eating out. Disconnect cable services and other luxury expenses. (Keep the internet if you’re going to use it for job searching or making money part-time.) If you have a cell phone and a landline phone, choose one. Make sure the phone you keep in service is the one you’re putting on job applications and résumés. Scale back so you won’t have to scramble to keep up.

Pay all your bills on time, especially those that report to the credit bureaus. Because you have to make your unemployment income last as long as possible, make just the minimum on your credit card balances. The minimum payment will be more affordable than any higher payments you’d previously been making, i.e. as part of a plan to get out of debt.

If you miss any payment, it’ll be harder to catch up again because you’ll have to pay a late fee on top of your minimum payment. However, if you do miss a payment, make the effort to get current on your payment.

The further behind you get, the harder it will be to catch up, and the more your credit will be impacted.

Apply for forbearance on your student loans. You may be able to make interest-only payments for a few months until you start working again.

Stop creating new debt. You may be tempted to open up new credit cards, run up balances on your existing credit cards, or take out a loan to help make ends meet. Maybe you have to use these methods as a very last resort, but avoid it if you can. Don’t try to use debt to keep your life at your pre-unemployment level. Before you know it, your balances will be out of control and you’ll reach your maximum borrowing ability.

New credit cards and loans mean an additional monthly payment and high credit card balances lead to higher minimum payments. More debt makes it harder to survive on your savings or unemployment income.

Just as you keep your spending to a minimum during unemployment, keep your borrowing at nil.

Try to maintain some type of health insurance. Medical debt is one of the biggest risks you face during unemployment, particularly if you experience a lapse in health insurance. Uncovered medical expenses can ruin you financially, sometimes creating tens of thousands of dollars in debt. Since unpaid, delinquent medical bills are now added to your credit report, often by a debt collector, it’s important to avoid them if you can.

Maintaining health insurance can be difficult but you have a few options. You may be able to keep your current health insurance under COBRA laws. However, you’ll have to pay the full cost including the amount that was previously withheld from your check and your employer’s part. It could be several hundred dollars a month.

Or, you can apply for health insurance under the Affordable Care Act. Visit healthcare.gov for more information.

Seek help when you can. Ask your creditors and lenders for any type of temporary reduced payment plans. Seek consumer credit counseling for help creating a budget or for a debt management plan to lower your credit card payments. Don’t be afraid to seek out government assistance like food stamps.

You can make it through a period of unemployment and maintain your credit and debt. You just have to make the most of your resources and avoid overtaxing yourself with more debt.