The COVID-19 pandemic has caused the unemployment rate to surge. As those facing unemployment worry about their loss of income, finding a new job and even unemployment scams, they also may have concerns on how unemployment affects their credit.

Luckily, your current employment status does not appear on your credit report or directly affect your credit score. While your credit report may contain employers you provided on previous credit applications, this information is not comprehensive and doesn’t indicate whether or not you are currently employed.

In short, the mere fact that you lost your job does not affect your credit. However, the loss of income can indirectly affect your credit in a few ways.

1. Late Payments

Payment history is the single most important factor that determines your credit score. It tells creditors how reliable you are when it comes to paying your bills. A single late payment can significantly lower your credit score, and multiple late payments can be a huge red flag for creditors.

The loss of income due to job loss could put you at risk of being late on payments. To avoid this, you should establish a strict budget when you lose your job, focusing on necessities and eliminating unnecessary expenses. Hopefully, you can make your payments while you look for another job.

If you are behind on a payment, it’s better to pay now than not to pay at all. The later the payment, the more damage it can do to your credit. Late payments are preferable to accounts in collections or court judgments.

2. Increased Credit Utilization

Your credit utilization is the amount of available credit you are using. For example, if you have a credit card with a $1,000 limit and a $500 balance, your credit utilization for that card is 50%. It’s a good idea to keep your utilization low and stay away from the credit limit, as high credit utilization can lower your credit score.

After losing your job, you may be forced to charge more expenses to your credit card and make smaller monthly payments, which can cause your utilization to rise. If possible, limit the amount of charges you make and avoid maxing out your cards – it can damage your credit score and reduce the amount of credit you have available for true emergencies.

3. New Credit Accounts

Opening up several new loans or credit cards to help you survive unemployment can cause your credit score to drop. The age of your accounts factors into your credit, and too many new accounts can lower your score. Too many hard inquiries resulting from credit applications also can do short-term damage to your credit.

How to Avoid Damage to Your Credit After a Job Loss

There are many things you can do to avoid damage to your credit after losing your job:

  • When you are employed, you can contribute to an emergency savings fund, which should contain at least a few months’ worth of expenses. You can dip into the fund to afford your bills while you’re unemployed.
  • Establish a lean budget while you search for a new job. Top priorities include bills, food, rent and other necessities. Unnecessary expenses should be avoided. Avoid racking up too much credit card debt.
  • Talk to your creditors and service providers about your financial situation before you’re late on a payment. You may be able to avoid late fees and late payments on your credit report if you can work out an alternative payment arrangement. Many companies would rather negotiate a compromise rather than see you stop paying your bills.
  • Monitor your credit report and do your best to maintain it so you don’t have to dig yourself out of a hole once you get a job.