How to Rebuild Your Credit After Long-Term Unemployment

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A lapse in employment can leave your credit score in shambles. You can do all you can to preserve your credit score, but during a long period of unemployment, you may have to make some difficult spending decisions that result in credit score damage. Once you’re back on the clock bringing in steady pay, you can begin rebuilding your credit score.

Get an idea of how much money you’ll be bringing in.

First, you need to know what you’ll be making on your new job.

That will give you some idea about the lifestyle you can afford and what you can afford to put towards getting your credit back on track. Keep in mind that you’ll have taxes or other benefits deducted from your paycheck, so your actual take-home pay may be 30-40% less than what you’re expecting. Your first paycheck will give you a true idea of what you’re going to make enough month.

Create or update your household budget.

Next, create a budget including all your known expenses. For your debt payments, use the regular or minimum monthly payment. Paying extra to catch up is part of the plan to rebuild your credit, but first, you have to figure out how to pay your regular monthly expenses. At the end of the budgeting process, calculate how much money you’ll have leftover after paying bills. This is the extra money you can put toward catching up on your bills.

Stop living off your credit cards.

With a loss of income, you’ve probably been using your credit cards to make ends meet.

Now that you’re employed, you’ll have to start depending on your income to pay the bills. Breaking your credit card dependency may be hard, but it’s a necessary step toward rebuilding your credit. Tricks like freezing your credit card or a sticky note warning you not to swipe can help you think twice about making more credit card purchases.

Make a list of your debts

Note which debts are current and which are past due. For all that are past due, list the amount of the delinquency and the number of months past due or the collection or charge-off status.

What to catch up on first?

Figuring out which order to catch up on your bills is a tough choice, especially if you’re behind on several. Your mortgage and car loan should take priority over your credit cards, particularly if you don’t want your home foreclosed or your vehicle repossessed. If either process has already started, contact your lender to figure out what you need to do to get caught up. Ask if there’s a way to spread the past due balance over several months until you’re all caught up against.

Let’s say you’re not behind on your mortgage or auto loan, only on your credit cards. If you have any that are close to being charged-off, e.g. approaching 180 days or six months past due, try to catch up on those payments to keep the account from being charged-off or being sent to collections.

Unfortunately, you may not be able to save all your accounts. Choose the card with the issuer who you want most to remain in good standing with. For example, if you have a credit card with the same bank as your checking account or mortgage loan, you may try to save that one.

Or, if you have an American Express credit card, you may try to save that one.

Call your creditors to make a plan to catch up. Consider contacting a consumer credit counseling  agency who can work out a debt management plan with your credit cards and loan accounts. You’ll pay one lump-sum payment to the credit counseling agency and they will, in turn, pay all your accounts.

Note that your utility payments, cable and internet, and cell phone don’t affect your credit as long as your payments are made on time. Many utility service providers do not report to credit bureaus, so falling a month behind may not affect your credit score if as long as you get caught up. However, if these payments become severely past due, to the point that your services are disconnected, your credit is at risk. Cancel the services you no longer need if you can no longer afford the monthly payments to protect your credit.

Cleaning Up Your Credit Report

Late payments may have caused your credit score to drop, but there are a few tactics that may help you clear them up. Keep in mind that if you actually were late, the credit bureaus can legally report this payment status for the duration of the credit reporting time limit.

If high credit card balances are hurting your credit score, the remedy is to pay these balances down. You probably won’t be able to do it all at once, so take it month by month, paying as much as you can toward one credit card until you’ve paid off that balance, then moving on to the next credit card.

Get Positive Information on Your Credit Report

Taking care of the negatives will definitely help your credit score. But, you'll also need positive information to help improve your credit score. If you still have open accounts, making timely payments on them each month will help improve your credit score. But, if all your accounts have been closed you'll need new ones to completely rebuild your damaged credit.

Focus first on taking care of your past due bills. Then, once you're caught up, consider getting a new credit card. Secured credit cards and other credit cards for people with bad credit are good prospects. Remember, once you get started with credit again, to handle your credit cards responsibly, charging only what you can afford and paying on time every month.

With discipline and a solid plan, you can successfully rebuild your credit score. Just be patient with the process and diligent about managing your credit going forward.