Consumer Comeback Blog

How to Manage Your Credit, Debt During Unemployment

Financial experts advise consumers to have three to six months of savings to cover emergency expenses, but that expectation is simply unrealistic for millions of Americans living paycheck to paycheck.

So what happens when the paychecks stop coming? Regardless of the reason, be it layoffs, termination, or quitting, losing your job brings significant emotional and financial upheaval, especially if you are living in debt.

Managing your bills when you are unemployed can be a juggling act, but the first step is to prioritize secured from unsecured debts. Secured debts typically have some sort of collateral such as mortgage payments and car loans. Financially struggling consumers should pay these first to prevent foreclosure or repossession. Unsecured debts such as credit cards, medical bills, student loans, and child support are not tied to property, and typically require a court order before they reach the ultimate consequence of wage garnishment.

That being said, you should still make every attempt to pay at least the minimum payments on your debts, and pay them on time. Late payments and delinquent accounts will appear on your credit report and can adversely affect your credit score.

So what happens when you can’t make the minimum payments? The Federal Trade Commission recommends consumers to contact their creditors as soon as they start experiencing financial strain.

“Tell (creditors) why it’s difficult for you (to make payments), and try to work out a modified payment plan that reduces your payments to a more manageable level,” the FTC website advises. “Don’t wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.”

Bear in mind, making arrangements with your creditor may result in higher interest rates, and reduced credit limits, which can also ding your credit score. Consumers in financial distress should monitor their credit report and their credit score to check for accuracy of all debts to know exactly the extent of their own debts.

According to the Fair Credit Reporting Act, people who are unemployed or searching for a job, as well as anyone receiving government financial assistance are entitled to an additional free credit report at AnnualCreditReport.com.

Rod Griffin, director of public education for Experian, one of the three largest credit reporting agencies that provides credit scores, gave some surprising advice to unemployed consumers.

“Don’t be consumed by worrying about your credit score if you are unemployed,” Griffin said “The only time a credit score really matters is if you are going to be applying for new lines of credit or taking out new loans, which you should not be doing when you are unemployed. The last thing you want to do is take on more debt.”

Griffin also dispelled myths about how prospective employers are looking at credit scores and credit reports to weed out job candidates.

“Employers never receive a credit score,” Griffin said. “They may look at a credit report in a fairly small percentage of hiring situations typically for positions related to money management. Looking at a credit report is only part of the process, and employers take that into consideration especially in light of today’s economy.”

Data from the Society for Human Resource Management (SHRM) supports Griffin’s assertion that bad credit history is no longer the employment hindrance it once was. A 2012 SHRM survey indicates that fewer companies are conducting credit history background checks on prospective employees than in 2010, and 80% of employers hired a candidate despite a poor credit history.

“Your credit scores will likely decline while you are unemployed, but that shouldn’t be your major concern,” Griffin said. “Your focus should be managing your living expenses and the debt you have, so when you get back on your feet, you can begin to rebuild your finances more efficiently and effectively.”

Comments