How to Build Credit When You’re Unemployed

Having a good credit score is important for getting loans, credit cards, mortgages, rental applications, and more However, building and maintaining good credit can be challenging when you don’t have a steady job.

When you’re unemployed, you may not have a reliable income to make regular payments on debts and bills Missed or late payments can lower your credit score. Fortunately, there are steps you can take to build your credit even without a job.

Why Credit Matters When Unemployed

Your credit report doesn’t show your employment status, so being unemployed won’t directly hurt your credit score. But having a job makes it easier to pay bills on time, which is a major factor in your score.

Without income, you may need to rely more on credit cards or loans. This can increase your credit utilization ratio – how much of your available credit you’re using. High utilization can negatively impact your credit.

Building credit while unemployed requires diligence. But it’s worth it because you can get better loan terms in the future.

Establish Credit Without a Job

You don’t need income to start establishing credit – just make payments on time. Here are some options:

• Authorized user: Ask a family member with good credit to add you as an authorized user on their credit card. Their payment history will be reflected in your credit report.

• Secured credit card: With a secured card, you provide a cash deposit that acts as your credit limit. It’s reported like a regular card but with less risk to the issuer.

• Credit cards for stores: Credit requirements for department store cards are usually less strict. Use one responsibly to build payment history.

• Credit-builder loan: These loans place the amount borrowed into a savings account. Make payments as agreed and payment history is reported.

• Student loans: Federal student loans don’t require credit checks. Making on-time payments helps establish positive history.

• Secured loans: Some lenders offer small, secured personal loans to build credit for people with no or low scores.

Maintain Credit When Unemployed

Once you have credit established, focus on maintaining your scores when unemployed with these strategies:

• Make at least the minimum payment on all accounts each month. Set payment due date reminders.

• Pay down balances whenever possible. Even small lump sum payments help.

• Lower credit utilization by limiting new charges and requesting higher limits.

• Avoid closing old credit card accounts as the lowered total limits can increase utilization.

• Enroll in hardship assistance programs offered by lenders and services to defer payments if needed.

• If you pay after the due date, ask the lender to mark your account as “current.”

• Only apply for new credit if absolutely necessary – new inquiries lower scores temporarily.

Alternative Sources of Income

When unemployed long term, finding some income source is key to covering bills and minimum payments. Consider:

• Part-time or gig jobs like rideshare driving, food delivery, freelancing.

• Selling unused items around your home.

• Renting out a room or space temporarily.

• Small personal loans from family/friends or credit unions.

• Hardship withdrawals from retirement accounts in extreme cases.

• Unemployment benefits, social security, disability income if qualified.

• Negotiating lower payments or rates from lenders and services.

Use Tools to Monitor Your Credit

Keep close tabs on your credit by using free tools like Credit Karma and borrower education sites. Monitor for any inaccuracies or fraudulent activity.

Enroll in credit monitoring if offered by your bank or card issuer. This alerts you to any meaningful changes in your reports so you can dispute errors promptly.

Regularly check your credit reports from Experian, Equifax and TransUnion. You can get these for free weekly during COVID on AnnualCreditReport.com.

Seek Additional Financial Help If Needed

If you accumulated substantial debt before becoming unemployed, get help creating a debt management plan. Nonprofit credit counseling agencies can provide this service.

Consider credit consolidation products like balance transfer credit cards or loans to reduce interest costs. But shop carefully to avoid predatory lenders.

For managing multiple debts, debt settlement may be an option. The companies negotiate with creditors to settle accounts for less than the full balance. This does have credit impacts, however.

Bankruptcy is a last resort if you absolutely cannot repay debts. Meet with a credit counselor first to consider all alternatives.

Rebuild Credit After Employment Gap

Once re-employed, focus on rebuilding your credit by:

• Making timely payments on all new and existing accounts. Set up autopay whenever possible.

• Paying down credit card and loan balances to lower utilization. Pay more than the minimums.

• Limiting new credit applications until your scores have recovered.

• Correcting any errors on your credit reports by disputing them.

• Letting previous late payments and collection accounts age on your reports. Their impact lessens over time.

• Practicing excellent credit habits like staying well under credit limits.

With diligence and patience, you can repair the short-term damage of an unemployment gap and improve your scores over time. Monitor progress so you know when your credit profile has fully rebounded.

The Bottom Line

It’s challenging but possible to build or maintain credit without steady employment. Make smart use of starter credit options, reduce debts and balances when possible, and leverage credit monitoring tools.

Sources like credit counseling agencies and community assistance programs can also provide guidance on managing your finances during unemployment. With planning and discipline, you can preserve your credit worthiness for the future.