Fears of a recession in the economy have been floating around for months. According to the National Bureau of Economic Research, we aren’t in a recession. However, thousands of workers were laid off by their employers in 2022. As the trend of layoffs trickles through the economy, it’s important to take steps to safeguard your finances against a potential layoff.
If you are concerned about the potential impact of a layoff on your finances, you are in the right place. We will explore how to protect your credit score from the fallout of a layoff.
When you are laid off from your job, that won’t directly impact your credit score. After all, your employment status isn’t a factor your credit score considers. But the sudden loss of income could cause your finances to get messy, which could lead your credit score to take a hit.
There are five factors that make up your credit score. These include:
A job loss won’t directly cause negative impacts on your credit score. But losing your job is often a big shakeup for your personal finances. If the changes push you to miss payments or take on more debt, you could see your credit score fall after a job loss.
No one wants to experience a layoff. But you can diminish the financial aftershocks of a layoff by choosing to create a safety net before getting a pink slip. Even if you are not concerned about potential layoffs at your company, it’s still a good idea to prepare yourself for an unexpected loss of income.
If you are concerned about the fallout of a layoff, it’s a good time to consider spending cuts. When you shrink your expenses, you’ll need less to get by if a layoff suddenly cuts off your income.
Here are some ways to slash your spending:
As you cut back on your expenses, you’ll make it easier to survive financially after a layoff. Plus, all of these cuts can help you make progress toward other financial goals while your income is stable.
An emergency fund is a key piece of any stable personal finance plan. It acts as a safety net for your finances. If something goes wrong, like if you get laid off from your job, you’ll have some funds on hand to cover expenses while you find a new source of income.
In terms of your credit score, an emergency fund can help you continue to make on-time payments to your debt obligations after a job loss. Plus, you can use these funds to cover your living expenses instead of taking out debt to get through this difficult time.
In general, personal finances experts recommend having between three to six months’ worth of living expenses in your emergency fund. For example, if you spend $2,000 per month, you’d ideally save between $6,000 to $12,000 in your emergency fund. However, you might decide to save more if you see a layoff coming your way.
Of course, saving up this chunk of change isn’t easy. If you aren’t able to build up this size of an emergency fund, start by tucking away what you can. Even having a few hundred dollars on hand can make a difference after a layoff.
Need some tips on building an emergency fund? Check out How to Build an Emergency Fund.
Debts that have a high interest rate attached are a drain on your finances. Each month, you are stuck with a monthly payment that can suck the life out of your budget and make it difficult to stay afloat after a layoff.
If possible, work on paying down your high-interest debt. For example, if you have a credit card balance with a sky-high interest rate, paying off that balance might be the right move to protect your credit score. Reducing what you owe now can help keep your payments lower after a potential layoff.
Not sure how to tackle your debts? If you are worried about the interest rates, then the avalanche method might be the right fit. Within this debt repayment strategy, you’ll pay off the debt with the highest interest payment first. After you’ve eliminated the debt with the most interest, you’ll tackle the debt with the next highest interest payment. Eliminating your high-interest debt first is the most mathematically efficient path to becoming debt-free.
Learn more in Snowball vs. Avalanche: What Is the Best Way to Pay Off Debt?
Before paying off your debts, consider building a small emergency fund. For example, you might save up a few hundred dollars before throwing the rest of your income toward debt repayment.
As an employee, the paycheck you receive from your employer is likely your main source of income. For many Americans, their paycheck is their only form of income. If you lose that main source of income, it can be challenging to protect your credit score after a layoff. Luckily, there are countless ways to build extra income streams.
With extra income streams, you can use the funds to tackle your financial goals. For example, you might use the funds to build up your emergency fund or pay down high-interest debt. Either action can help you protect your credit score after a job loss.
But if you lose your job, these new income streams offer a way to keep paying all of your bills on time. With the ability to keep up with your expenses, you can protect your credit score in the event of a layoff.
Here are some extra income streams to consider:
Of course, this is just a starting point for building extra income streams. Don’t be afraid to get creative when searching for a new income source that suits your needs and interests.
If you experience a layoff, it will likely come with a wave of emotions. It’s often difficult to make the right decisions amidst an emotional rollercoaster ride. With that, it’s a good idea to map out your post-layoff plans before you receive a notice.
Here are some steps to consider in your layoff plan:
A layoff won’t be a fun experience. But with a little bit of planning, you can walk into the situation as prepared as you can be.
While a layoff won’t directly impact your credit score, the financial implications of a layoff could push your credit score down.
If you anticipate a potential layoff in your future, consider taking action to create a smooth financial journey. Increasing your savings and building extra income streams can make all the difference to your credit score after a layoff.
Even if you don’t foresee a layoff, you never know what life might throw your way. Working through the steps above can help you protect your credit score from many kinds of emergencies. Whether you experience a temporary gap in work or have to cover a major unexpected expense, these tips can help you stay afloat.
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