by Maurie Backman | Feb. 4, 2020
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Losing your job won't hurt your credit score immediately -- but it could have that effect over time.
Having good credit is important. Without a decent credit score, you may have trouble getting a credit card, securing a mortgage, or snagging a personal loan if you need one. And even if you are approved to borrow money, you could get stuck with a really high interest rate that makes that loan harder and more expensive to pay off.
That's why it pays to keep your credit score as high as possible. But what happens when you lose your job and the income that goes with it? Is your credit score suddenly doomed?
Being let go at work is never fun or easy, but the silver lining is that the loss of your job won't directly damage your credit score. There are five factors that go into calculating that number:
As you can see, income and employment status aren't on this list, which means that if you lose your job and the earnings that go with it, your credit score won't instantly take a hit. But if you don't get a new job soon, the knock-on effects of your lack of income could cause your credit score to plummet.
Without earnings, you could start falling behind on your bills, at which point your payment history will suffer. And if you rack up high levels of debt because you don't have an income to cover your living costs, you'll drive your credit utilization upward, thereby driving your score downward. So while it’s reassuring that the loss of a job won't directly hurt your credit, it could do so indirectly.
Sometimes, even the most hard-working, diligent employees lose their jobs when financial circumstances force layoffs. And if you happen to clash with your new manager, you could lose your job -- even if you make a habit of showing up on time and doing what you're supposed to do. As such, job loss can sometimes be unavoidable. But you can do your part to protect your credit score and finances by having a solid emergency fund set up to tide you over.
If you sock away enough money in a savings account to cover three to six months of essential living expenses, you'll have cash reserves to tap in the event that you’re out of work with no paychecks coming in for a while. And that, in turn, could enable you to keep up with your bills during that period of unemployment. Not only could you avoid hurting your payment history, you'll also avoid debt and keep your credit utilization in favorable territory.
Of course, building emergency savings is easier said than done, but if you make a solid effort to cut back on expenses, you can slowly but surely free up cash for your bank account. The same holds true if you get a side gig temporarily and save your earnings from it rather than spend that money.
Losing a job can be a harsh blow, but it doesn't have to wreck your credit. If you prepare for that possibility by boosting your savings, you can survive a few months of unemployment with your credit score firmly intact.
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