Ways to help improve your poor credit history while unemployed

Quick insights

• Credit history is one of several factors that's considered when calculating your credit score.
• Unemployment can hurt your debt-to-income ratio, but there are strategies you can implement that can help manage your debts while you look for your next job.
• Your credit score is not permanent—you can make changes today that can positively impact your score and financial wellness.

When you have poor credit history, it could indicate that you may need to make some adjustments to your credit behavior. But how do you do this if you're currently unemployed? Let's review in more detail below.

What is poor credit history?

Credit history showcases your previous credit activity—such as opening or closing credit card accounts—and appears on your credit report. Having a poor credit history could indicate a few different things. It could mean that you're lacking credit experience, such as if you're just starting out on your path towards building credit. It could also mean that you have a history of not paying your balances or installments on time, leading to accumulation of debt. It could be due to having a high debt-to-income ratio, meaning that you may have more debts than you can afford to pay down.

Understanding your debt accumulation

If you have a high debt-to-income ratio, this can negatively hurt your credit score. Additionally, if you've missed payments, you are damaging your payment history, an important factor that goes into calculating your credit score.  

If you've lost your job, it can be hard to wrap your head around making your monthly payments without an income. Additionally, if you're feeling stressed, it could lead you to irrational actions and, as a result, overspending or accumulating more debt.

When you fall into various forms of debt, it can feel overwhelming. In fact, people may fall into what is called a “debt trap,” where they continue to apply for more loans to help offset the cost of their current debt.

To help you through this period of unemployment, let's review some strategies that can help you manage your debt while you search for a new job.

Strategies to manage and pay off debt while job searching

There are a few steps you can take to help you manage your debt while you're on the hunt for your next job. These include, but are not limited to, the following:

• Review and revise your budget. Take the time to look at your current spending habits and try your best to find places where you can cut costs. For example, are there subscriptions that you could freeze during this time of unemployment? Could you put that monthly payment towards your debts? It can be worth cutting non-essential purchases as these small but important actions can add up overtime.
• Look for extra sources of income. While you may be looking for a full-time job or your dream career, finding other ways to add more cash into your pocket can be helpful during this time. Consider part-time jobs or side gigs to help you cover some costs while you look for that next opportunity. This extra income can be used to pay at least the minimum on your credit accounts.
• Use a debt repayment strategy. Consider using the debt snowball method or debt avalanche method as ways to help you prioritize your debt repayments. The debt snowball method focuses on paying your smallest debts first then rolling that amount to your next-largest debt. The debt avalanche method prioritizes the high interest rate debts first.

What to do if you can't make payments

Even if you've taken all the steps you could to try to make ends meet, you may find that you still can't make your payments. Because payment history is such an important part of your credit score and your credit history, you may need to take additional action to prevent further harm to your credit. You could contact your lender to discuss your situation and create a plan of action towards repayments.

You could also consider government programs, should you qualify for them, to help assist you. These could be in the form of forbearance or deferment programs. You may need to research your state's specific rules around these programs and applications.

The impact of debt on employment opportunities

When you have a low credit score, it could potentially hinder you from obtaining future employment opportunities. Some employers may run a soft credit check during the hiring process, in which they review your credit and see if you're responsible with your money management.

While a low credit score does not define you or your worth, it may influence how a lender, employer or landlord views your ability to meet expectations.

Thankfully, like anything in life, your credit score and credit history aren't permanent. With some adjustments and consistent changes, you can help improve your credit history and develop a new, healthy foundation of financial wellness.

Staying motivated throughout the debt repayment process

When you're in a financial rut, it can be hard to keep yourself motivated or focus on the positive, especially if you're simultaneously looking for another job. When possible, think about the ways in which the changes you're making now can help improve the future you. It may be difficult now—reviewing budgets, prioritizing repaying debts over fun purchases and making regular payments is no easy feat. However, you may find that with consistent hard work and adopting healthy financial habits, you may be able to build your credit profile.

Remember, this is a marathon, not a sprint. Making lasting changes takes time. Start with realistic, achievable goals that you can celebrate and which help motivate you. For example, make note if you managed to decrease your spending for one week. Take pride in moments where you didn't need to take out additional debt to cover the cost for something.

Just because you're in this situation now, doesn't mean you'll be in it forever. Keep your head up and continue to track your score to see how your changes are positively impacting your financial situation.

In conclusion

Credit history can be essential for helping you obtain financial opportunities, such as loan approvals and lower interest rates. If you're unemployed, it can be hard to maintain a positive credit history, as your debt-to-income ratio is an important factor in determining your creditworthiness. However, by implementing some smart strategies today and setting yourself up to achieve realistic goals, you may be able to build a path forward to improved financial wellness.