Credit Myth: Employment History Impacts FICO Scores
Every so often an old credit myth I haven't heard in awhile will pop up again during a conversation with some friends. This past weekend it happened during a chat with a colleague about unemployment and its effect, or lack thereof, on FICO scores.
Contrary to what many people think, you can be unemployed for a long period of time and still maintain excellent credit scores. The truth is the FICO credit-scoring model doesn't consider your employment history in any way, shape, or form. Like the level of your income, it's a complete non-factor.
Of course, having a steady track record with work and a hefty income can certainly make it easier to always stay current on your bills and get approved for various types of credit. However, employment history itself has zero effect on your credit scores. Unfortunately, people tend to equate unemployment with poor credit because it's often a time period during which it becomes difficult to stay current on bills.
Once you start racking up credit card balances and missing payments, that's when the major damage is done to your credit scores. But it's primarily the payment history and your credit utilization ratio doing the damage. Not your employment history. So how can you maintain good FICO scores even during a period of unemployment? It all comes down to planning ahead and building an adequate emergency fund. This is one of the most basic rules of personal finance, yet so many people still to choose to ignore it.
While a job loss can be devastating to anyone, it doesn't mean you have to immediately trash your credit scores by missing payments on your home, car, or credit cards. Keep an emergency fund stashed away that will cover all your expenses for at least 6-12 months, and you'll be in a much better position to maintain those credit scores you've worked so hard to build while searching for a new job to replace your lost income. Photo by Brenda Gottsabend