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Q: Will applying for Pandemic Unemployment Assistance (or regular unemployment benefits) negatively affect my credit score? Are there any other sneaky disadvantages? I’m worried taking unemployment compensation during COVID-19 will make it harder to apply for a home loan when this thing is over.
A: The short answer: Unemployment won’t affect your credit score. At least, not directly.
Unemployment Claims and Your Credit Score
The long answer: It’s generally more difficult to qualify for a home loan while you’re unemployed. However, that’s just because it’s hard to prove to your lender that you can make the monthly payments on your mortgage in the immediate future, not because admitting you’re unemployed somehow impacts your credit score health. Instead, credit bureaus calculate your score solely based on your credit history, debt, and your payment history.
That said, long-term unemployment can correlate with a deflated credit score. That’s because unemployment payments, including those from Pandemic Unemployment Assistance (PUA), usually amount to less than what you’d get from an employer (30% to 50% less, depending on your state laws). In most cases, even with government assistance, you’ll still be tight on cash, which can make it hard to file minimum payments for your credit card, student loan, or mortgage on time. That’s when your credit score would start to get affected, says Thomas Nitzsche, a personal finance expert and media manager at Money Management International.
If you’re interested in keeping a healthy credit score, it’s in your best interest to accept any income boost you can. Unemployment benefits can be a lifeline to regaining financial stability and avoiding missed or late payments, credit counselors say.
“My advice would be to not worry about collecting unemployment and instead focus on creating a priority budget to meet basic needs and contact all creditors to see what hardship plans are available,” advises Nitzsche.
Fortunately, the recent CARES Act¹ provides credit protections for people who have to do just that. If you know you’re going to miss a mortgage, credit card, or other debt payment, call your servicer and let them know ASAP. During the “covered major disaster period,” creditors aren’t allowed to submit negative credit reports if they agree to let you defer payments due to a coronavirus-related reason. Instead, they have to report you as current on your payment as long as you stick to whatever deal you work out with them, says Amy Loftsgordon, a foreclosure and debt attorney and a legal editor at Nolo.
The covered disaster period is any time between January 31 and 120 days after the national emergency is declared over. Right now, credit counselors say most credit card companies are allowing one- to three-month deferments, no strings attached. Federally-backed mortgage loans get a bigger grace period—up to 180 days of forbearance with the possibility of an 180-day extension.
“But this prohibition on adverse reporting only applies if you weren’t already behind,” warns Loftsgarden. If you’ve already let some payments slide or are carrying a credit card balance, you can call your creditor to make an agreement, get caught up on payments, and then take advantage of the credit reporting protections in the CARES Act from then on. That will help limit the damage to your credit score.
As for the question about sneaky disadvantages to taking unemployment benefits? There really aren’t any, says Nitzsche.
“People shouldn’t feel punished or guilty for needing support for a loan payment, especially during a worldwide pandemic,” he says. Other benefits to applying now: Eligibility requirements are more lax, recipients are getting an extra $600 per week of assistance, and states are extending the period you can receive unemployment by 13 weeks.
Think of it like any other kind of insurance: Your employers—or, in the case of PUA, the federal government—put aside money just for you in case you lose your job. If you’re eligible, you’re legally entitled to the assistance, generally penalty-free.
Disclaimer: The opinions expressed by the interview subjects are not necessarily those of Earnest.
1 AN UPDATED NOTICE FOR BORROWERS WITH FEDERAL STUDENT LOANS: We want federal student loan borrowers to explore all their options before applying to refinance their federal student loans. Refinancing a federal student loan with a private lender means you will no longer have access to any benefits of your federal loans, including the temporary 0% interest rate and suspension of payments effective through December 31, 2022 and the debt cancellation on federally held loans announced by the Department of Education on August 24, 2022 (which includes up to $10,00 in debt cancellation for qualifying federal student loan borrowers – the amount is increased to up to $20,000 for qualifying Pell Grant recipients), the Public Service Loan Forgiveness Limited Waiver Option available through October 31, 2022, or any other current or future measures implemented for federally held loans. Please carefully review your current and potential benefits with your federal loan servicer, including debt cancellation and loan forgiveness options such as Public Service Loan Forgiveness and Income-Driven Repayment, before refinancing. To learn more about debt cancellation, visit https://studentaid.gov/debt-relief-announcement/.