Job Loss Can Do a Number on Your Credit Score

If you're unprepared, unemployment can zing your credit score.

Although employment status isn't listed on your credit report, loss of income can bring bill-paying to a standstill, and missed payments can drastically lower your credit score. Plus, many employers will run credit checks on job applicants, so maintaining healthy credit, monitoring debt and paying on time are essential.

If you do your own credit monitoring, you may already know how your credit score is calculated. If you're unemployed, three of the five factors used – what you owe, length of credit history, and credit mix – are largely fixed, and being out of work won't help you change these.

The good news is that nearly half of your credit score – 45% – is based on factors you can manage while you're unemployed:

1. Bill paying: Your payment history accounts for the lion's share (35%) of your score, and while you can't change the past, you can make sure future bills are paid on time, even during unemployment. Recent bill-paying counts more than older history. One late payment can drop your score by 100 points, so monitor your credit.

2. New credit: 10% of your score is based on how you acquire new credit. Monitor your credit habits – don't apply for new cards all at once. Piling on new debt while you're out of work will just increase your stress. If you're still working but believe a layoff's coming, here's how to safeguard your credit:

Build cash reserves

* Create an emergency fund.

Save six months' worth of living expenses in a money market account to tide you over any job loss.

* Get a home equity line of credit (HELOC).

HELOCs offer easy access to cash in an emergency and real peace of mind. Interest rates are tax-deductible and much lower than credit cards. You might use a HELOC to pay off high-interest debt, but be sure you can repay the HELOC or you risk losing your house.

Tip: Apply for a HELOC before you're unemployed.

Credit monitoring during these difficult times is advised. Check your credit reports periodically.

Source by Dawn Handschuh

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