Losing a job is stressful. It makes you feel like someone pulled the rug out from under you. While it’s overwhelming and may even cause you to grieve, it’s important to think about what to do next.
Start by creating a priority list of your expenses. It will help you manage your new normal and reduce your stress.
It will also help you minimize the damage to your credit score as you’ll know what bills you must pay.
The lack of income makes it hard to cover your expenses, which can cause your credit score to fall. But there are ways to preserve it, even if you are out of work. You must be consistent and diligent in your efforts to keep your credit score up after a job loss.
Here are four tips on how to protect your credit score if you have lost your job:
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Budget Your Emergency Savings
If you have an emergency savings account, now is the time to use it. Budget the money to cover your major expenses. Think of your mortgage or rent, utilities, car loans, personal loans, and utilities. Don’t forget about necessities, such as food and clothing too.
If you have credit card debt, don’t ignore it, even when you’re struggling financially. Not only does paying them late affect your credit score, but the late penalties and accrued interest add up quickly. While making the minimum payment doesn’t get you far, if that’s all you can afford, do it as it preserves your credit score.
Keep Credit Card Balances To a Minimum
You may feel like paying your bills with your credit cards, but avoid it if you can. Your credit card balance greatly affects your credit score. 35 percent of your credit score is your credit utilization rate. This is the comparison of your outstanding balances to your credit line.
Ideally, your credit utilization rate should be less than 30 percent. For example, if you have a $1,000 credit line, you shouldn’t have more than $300 outstanding at one time. If your utilization rate gets higher than 30 percent, it brings your credit score down significantly.
Ideally, you should pay your credit card balances off in full each month. If you can’t, focus on that 30 percent threshold, keeping your balance as low as possible.
Get Help With Household Expenses From Your Local Government
Covering all your bills after a job loss is hard. Many state and local governments offer utility and energy payment help, though. Visit your state government’s homepage to see if they have a Low Income Home Energy Assistance Program (LIHEAP). This program offers temporary payment assistance for those who need help paying utility bills.
You can use the money you save on utilities to cover other expenses on your priority list that affect your credit score.
Avoid Opening New Credit Accounts
It’s easy to panic while you’re unemployed and think you need more credit accounts. First, it’s hard to get approved when you don’t have a job. Second, just applying for new credit accounts may hurt your credit score.
If you get approved, you have a higher chance of charging more, which increases your utilization rate and lowers your credit score. Any new credit also lowers your credit age. This makes up 10 percent of your credit score. The ‘older’ your credit cards are, the ‘older’ your credit age. This helps your credit score increase, as lenders see new credit as a risk or as a sign that you’re in financial distress.
If you’re having trouble paying your bills, reach out to your creditors rather than opening a new credit line. Many companies have options, including payment deferral, payment arrangements, or temporarily lowering APRs.
Maintaining Your Credit Score Can Help You Snag That New Job
Did you know that many employers check your credit score? They use this as a part of the background check. Employers want to see that you’re financially responsible. A low credit score may indicate that you aren’t financially responsible, which makes it harder to find a job.
It’s important to get organized financially after a job loss. Create a new budget – one that accounts for the lower income you’ll receive from unemployment. Take your list of prioritized bills and see how your budget works with it. Create your new budget for the time being and stay mindful of every penny you spend. Being proactive about your spending and prioritizing your bills will prevent your credit score from falling.