Losing your job can be a traumatic event. It can affect all aspects of your life adversely, especially if you are the sole breadwinner of your family. An unexpected lay off can create chaos in your personal as well as professional life, forcing you to reset your priorities and coming up with future plans. You might also have to re-evaluate your spending habits and adjust your lifestyle until you can gain financial independence and employment again.
While it’s natural for you to focus almost-exclusively on finding a new job, there is an often-neglected impact of losing your job that you must take into account as well. Not many people are aware of the fact that losing a job and long periods of unemployment can detrimentally impact your credit score. Just to clarify, your credit score takes into account your past loans and debts, as well as repayment history, but it does not show whether you are employed or unemployed. Thus, your credit score is not impacted by job loss until you can pay all your debts or loans on time.
Credit scores are compiled by one of the four major credit scoring agencies in India: CIBIL, Experian PLC, Equifax Inc, and HighMark Federal Credit Union. When creating your credit report, these agencies include your loan and credit card information for the past seven years. Although your report doesn’t contain any record of employment status, work history or personal income, the truth is that losing a job can increase the chances of defaulting on EMIs, and thus, lowering the credit score.
How does my credit score affect my job search?
Your credit score can also impact your job search, so it’s essential that you maintain a good credit score in order to gain employment. The importance that an employer gives to your credit score depends on the industry and type of organisation.
Certain organisations may not even verify your credit score as it won’t affect the outcome of the employment decision. However, some sectors, like banking and finance, consider a good credit score important while considering a candidate.
Here is a breakdown of some of the industries that might consider the credit score while hiring employees:
- Banking and Finance Sector
The credit score is an essential criterion for organisations in the banking and finance industry. Customers in these two industries are expected to make payments right on time and maintain a good credit score. Hence, employers prefer to hire people who value the same ethics. Due to this factor, a poor credit score could hamper the scope of employment in this industry.
- Jobs with Financial Responsibility
How well a candidate handles their personal finances is one of the significant benchmarks that employers look for when hiring for positions involving financial responsibilities. Candidates with a poor credit score are often not hired for accounting positions, credit collection, cashier, etc., even in sectors that are not related to finance or banking.
- Debts exceed salary
In case an employer finds that you have a considerable debt that exceeds the salary that they are willing to pay for the position, they may decide that you are suitable for the position. A high debt level could put you under pressure to make more money than the position pays.
Does your income affect your credit score?
Your credit score is one of the most critical parameters that determine whether you’d get a loan; however, does it get affected by your income? The four major credit scoring agencies do not enlist an individual’s salary anywhere on the credit report. However, multiple miscellaneous credit scoring systems highlight all your finances, including your current and past incomes. In such reports, you can notice a lower or weaker credit score.
Loan approvals are based on several factors, including the credit score, monthly earnings, and many more factors. Banks and financial institutions look at your debt-to-income ratio (DTI), your loan and credit history, repayment patterns, debt situation, and recently applied loans when evaluating your creditworthiness. While approving a loan, lenders will look at your income, and in such cases, insufficient earnings can affect your loan repayment abilities.
Can you be denied a job because of a bad credit score?
Mostly, jobseekers get turned down for a job because of reasons like lack of confidence or experience, but in some cases, their personal finances might also have a play to the role. For many job profiles, especially the high-level positions, employers prefer to do a thorough check of credit history. Employer credit checks have a considerable impact on applicants, and according to a report, nearly one in 10 workers have claimed that they have been denied a job because of a credit card debt, while one in seven candidates were found to be rejected due to poor credit history.
A potential employer can use any one of the four major credit bureaus for a prospective employee’s credit check. They may also choose to hire an outside third-party to conduct this credit check. Another report found that out of companies who ran background checks on candidates; nearly 31% include credit information as well as other financial information in their reports.
What is a good and bad credit score?
Credit scores are decision-making tools that help banks and other financial institutions determine your credit history as well as loan repayment ability. They are also called risk scores as they help lenders assess whether the borrower will be able to make the payment for a debt. A good credit score is crucial as it helps in determining whether you will be eligible for a loan or not.
Your credit score is a three-digit number ranging between 300 and 850. It is based on the information in your credit report created by CIBIL. The number is valuable to lenders to assess your loan repaying abilities before offering you a loan. A score of 700 or higher is generally considered a good credit score, while a credit score of 800 or higher is deemed to be excellent. Anything 600-700 is considered average, and scores below that are generally deemed poor. Contrary to what you might believe, having a 0 credit score, i.e. someone with no credit history, is considered poor.
What are the factors that lead to a bad credit score?
A credit score is negatively impacted by several factors, like repayment history, number of loans applied over the years, high debt records, etc.
- Payment history
Your payment history plays a crucial role in determining your credit score. Missing loan payments or credit card EMIs or even a delay of one payment can affect your credit score negatively. Thus, you must always pay your installments on time, without fail.
- Having a high debt or credit
Existing high levels of debt are considered a red flag by most lenders. It shows that you are too dependent on credit to meet your daily expenses and needs. Lenders check credit utilisation, which is calculated by dividing the total amount of revolving credit that you are currently using by the total of all your credit limits.
- Number of loan applications
Most lenders check your previous loan applications and see how frequently you apply for loans. Every time a lender requests your credit reports, the inquiry is recorded on your credit file. Lenders look at the number of hard inquiries to assess how much new credit you are requesting and what is your current debt. Too many inquiries in a short period of time can be a red flag, and signal that you are in a dire financial situation and are also dependent on debt. Even rejection of loan applications can have a negative bearing on your credit score.
- Defaulting on loans
The negative account information which can show up on your credit report includes bankruptcy, foreclosure, repossession, etc. Each of these factors can affect your credit score negatively for years to come and makes it extremely hard to recover from.
How to improve credit score after a job loss?
Improving your credit score is not as difficult as it might seem. It may take some time; however, you can improve it by being responsible and developing good financial habits. Here are a few things that you must do to improve your credit score, particularly if you have just lost a job:
- Paying bills on time
By paying your bills on time, you can improve your credit score slowly, but surely. Repayment history is an integral part of your credit score. If you start paying your bills on time each month, you can improve your credit score over some time.
- Reducing your debt
You can reduce your credit card debt and lower your credit utilisation ratio to boost your credit score. If you have some savings, use them to foreclose smaller loans and saving some money on the interest as well.
- Limit new credit requests
New requests stay in your file for almost two years, but their impact reduces over time. So, make sure to limit the number of times you make hard inquiries for new credit. If you know you won’t be able to repay a loan without a stable job, don’t apply for one.
- Check your credit report for inaccuracies
It is vital to monitor your credit report periodically as errors can creep in. Furthermore, sometimes the report isn’t updated timely to reflect that you have repaid a loan or that you have foreclosed. As a thumb rule, check your credit score and report every six months or so.
- Clear outstanding payments
In case you have some outstanding payments on credit cards or debt instruments, it is essential to clear them up to improve your credit score. Late payment information stays in your credit file, as well as how late the payment was. As more time lapses, your credit score gets affected adversely.
It is vital to keep your credit score high even if you lose your job. Since several companies perform credit checks as part of the hiring process, poor credit history can cause you to lose out on potential jobs, so ensure that you pay all your bills on time and improve your credit score. Losing your job is tough as it is, and while you must focus on gaining employment, do your best to keep your credit score high so that you can land your next job easily.
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