While changing jobs frequently has lost a considerable amount of its previous stigma, lenders frown upon this occurrence when consumers are seeking mortgage loans or other types of credit.
When consumers attempt to obtain a car loan or mortgage, lenders examine an individual’s credit report, which includes their employment history. Job hoppers can find themselves with gaps or periods of time without any income, making them appear riskier to lenders, said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.
“The danger of job hopping is the inconsistency in your income and the difficulty it causes in keeping payments up to date with creditors,” he said.
Changing jobs is becoming more of a common practice now compared to a decade ago because of the current state of the economy. A 2015 Gallup poll found that 51% of employees are considering a new job, but people ranked increasing their current level of income as the third reason while career development ranked fifth. The top reason was seeking a job where they could perform at their best.
When banks and credit unions conduct a credit check, the lenders are examining an aspect of behavioral finance, said Diana Webb, an associate professor of finance at Northwood University in Midland, Mich.
“Job stability is the key to financial stability,” she said.
Paying Your Bills On Time
Creditors, even credit card companies, are wary of consumers who change jobs often, because it can lead to them not making payments for credit cards or other bills on time each month, McClary said.
“Lenders like to see consistency in employment,” he said. “Borrowers need to show their level of income remains steady and that they have been able to make payments."
While a good employment history is less critical for credit cards and car loans, lenders still factor in this criterion, noting when there are periods of unemployment, McClary said.
The factors that lenders evaluate to determine if a borrower will be able to repay a loan include income and job history, along with credit scores, payment history and debt to income ratios, said Doug Lebda, CEO of Lending Tree, the Charlotte, N.C.-based online lending broker.
“When there are gaps in income or unsteady streams of income, it can create a red flag since it shows some level of instability,” he said. “Lenders want to be as certain as possible that the loan will be repaid through dependable, on-time payments.”
Employment information is not calculated as part of a consumer’s credit score, even if the credit report includes employment information, Lebda said.
“It just depends whether your current or past employers report information to the credit bureaus,” he said. “Even if you’re unemployed, your credit score won’t be impacted as long as you keep making payments on time.”
Financial Instability Issues
Job hoppers, especially Millennials, are demonstrating a lack of commitment when they leave their positions too soon, said Webb. Lenders view this flux in employment as a sign of financial instability.
“You may be letting your emotions rule how you are working or living and essentially saying, ‘I am not happy with my work situation, therefore I am leaving,’” she said. “If you are changing jobs a lot, then you are probably going to be a poor risk as a client wanting to borrow money. Your stability just isn't there.”
While there is no golden rule on how long someone should work for an employer, people who change jobs once a year are developing a poor pattern, Webb said.
“Our research shows that Millennials do change jobs more frequently than older groups,” she said. “Changing jobs every six months is not good for your credit score. You need to change if you want to be financially stable.”
How To Increase Credit Score
Strengthening your credit score is crucial if you have a less than stellar employment history. Millennials can reinforce it by ensuring their bills are paid on time, even for smaller creditors such as your water or cell phone bill, Webb said.
Purchases on credit cards should be treated as a 30-day loan, especially ones with high interest rates, she said.
“Those interest rates are horrific and can weaken your credit score,” Webb said.
Some consumers are not concerned about their credit score, because they do not need a loan or credit card right now, said Rakesh Gupta, a professor at Adelphi University in Garden City. N.Y.
This belief could put consumers in a quandary if a lifestyle change occurs, because a low credit score means the possibility of being denied for a loan or stuck with a high interest rate for a year or two. Improving credit scores can not occur overnight, so managing debt over the long term is the best bet.
“This could cost you thousands of dollars extra in interest,” he said. “On a credit card it could be as high as 29% whereas someone with good credit could get a credit card with interest rate of 12%.”