When the COVID-19 pandemic hit, an estimated 18 million Americans were furloughed, according to Harvard Business Review. A furlough is meant to be a temporary arrangement where workers get to keep their jobs and hopefully return quickly, but they do not receive pay. Workers in businesses forced to shut down or experiencing declining revenue during the pandemic, such as restaurants, gyms, massage parlors and newspapers, may have been furloughed.
If you’re wondering whether being furloughed will affect your credit score, you can have peace of mind that furlough does not have a direct impact. However, it could indirectly negatively affect your credit score in other ways.
How does being furloughed hurt my credit score?
If you are not bringing in enough money, you may take out high-interest loans, use credit cards and make other risky financial moves to pay your bills. Suppose you’re unable to pay your balance in full every month. In that case, your score could go down as your credit utilization ratio — the amount of credit you’re using compared to the amount of credit you have available — goes up (it should always be under 30%). If you don’t pay your card at all, you could go into collections, which would bring your credit score down significantly.
Even applying for too many credit cards at one time could potentially hurt your credit score because each company will make a hard inquiry on your credit report, according to U.S. News & World Report. Just one inquiry could decrease your score by five points.
If your credit score goes down, that could have a range of consequences. Here are ways in which furloughed workers’ credit scores can affect them financially.
Your auto insurance premium may go up
Insurers can use your credit score to determine your auto insurance premium unless you live in one of three states: California, Hawaii or Massachusetts. If you live anywhere else, then you could have to pay a higher premium.
Even if you are furloughed and your score is lower than usual, you can still find the best auto insurance companies and ways to save. You could shop around and compare quotes from different insurers and find companies that provide discounts you may be eligible for. If you have a second car you don’t use anymore, you could always keep it in the driveway and cancel your insurance, as long as you get insurance when you start using it again.
Keep in mind that you shouldn’t cancel your insurance and still drive your car just to save money. “Driving without insurance because you can’t afford it due to unemployment is never a good idea,” said Howard Dvorkin, a CPA and chairman of Debt.com. “Those who find themselves unable to pay their car insurance because they’re unemployed should contact their car insurance company to avoid losing their insurance altogether.”
You may have to pay higher interest rates on loans and credit cards
When looking into the effects of a furlough on your credit score, you may find that you could end up having to pay higher interest rates on loans and credit cards if your score is low. Then, if you can’t pay your bill because it’s too high, you know that could also affect your credit score. It all creates a ripple effect that could be very damaging to your finances.
Additionally, lenders might see you as riskier if you aren’t bringing in much income, and they may not offer you good rates on loans and credit cards. “If you are approved for a mortgage or new credit card, be prepared to face higher interest rates and stricter terms given your lower income,” said Jim Pendergast, Senior VP at altLINE.
Again, it’s always a good idea to shop around for different loans to see if companies can offer you lower interest rates. Avoiding payday loans — which charge an average of 319% in interest, according to InCharge Debt Solutions — is always a wise move.
You could have trouble getting a mortgage
Many people are wondering, “Can you buy a house when you’re furloughed?” They may want to move out of expensive cities or get a place where they can properly social distance in light of the pandemic.
However, if you’re furloughed and your credit score goes down, it could be difficult to secure a mortgage if you have bad credit. Lenders may also label you as risky because you don’t have any income coming in.
Still, you may be able to obtain a mortgage if your employer writes a letter saying that the time off is temporary and you’ll return to work again soon. Additionally, it helps if you have a cosigner with a good credit score and income, your partner earns a decent living or you can afford a large down payment.
How to keep your credit score high during furlough
Being a furloughed worker is difficult. You might not know when your job will come back or how you’re going to pay your bills.
During this time, you can protect your credit score by paying your bills on time and using your unemployment pay for essentials. You could also create a budget and cut unnecessary spending such as eating out, cable and entertainment.
“Consumers should continue to keep their debts low, especially during this upcoming holiday season,” said Dvorkin. “The calendar year will change, but the economy likely won’t. Americans still need to prepare for the worst and work with their creditors as much as possible while they scale back their spending and budget.”
Another option is to ask your lenders and credit card providers if you can have an extension on your bill or if forbearance is available. With forbearance, you might be able to push back your payment date by a few months. Just remember that interest will still accumulate during these months.
Of course, you could always look for another job, perhaps in a different sector that is doing well during the pandemic. You are not beholden to your job, so as long as you give your employer two weeks’ notice and leave on a good note, your career should be just fine — and your credit score should be, too.