How An Unexpected Disability Can Hurt Your Credit

Unless you have money sources besides a paycheck, you may struggle to pay your bills and afford basic living expenses during your recovery from disability.

Without working, you may get by for a few months. 

If you have a full-time job, you may have a few weeks of paid sick leave or vacation time. 

If your disability occurred because of a workplace accident, you can qualify for workers’ compensation. Keep in mind that in 2010, more than 95 percent of reported member company disability claims by the Council of Disability Awareness were not work-related.

Some people with sudden disabilities apply for Social Security Disability, a federal, payroll-tax funded program managed by the Social Security Administration. However, only about 35 percent of applicants qualify. What’s more, according to SSA, the average monthly disability paid by SSDI was just $1,234 at the beginning of 2019.

A disability can quickly deplete whatever savings a person has accumulated. Only 34 percent of households have enough cash on hand to last three months or more without income.

Now consider that disabilities often last longer than a few months. In fact, the average length of a disability for a typical 30-year-old is 2.5 years. That likely means the average 30-year-old is unable to work — and therefore unable to make a living — for 2.5 years.

If you earned $70,000 a year at the time of your disability, you would need to have saved an emergency fund of $175,000 to maintain your lifestyle through your 2.5-year disability.

Think about how challenging it would be to save that much money for a possible disability. If you start your post-college career at age 22, you would have needed to save at least $20,000 a year to have enough to cover your 2.5-year disability at age 30. Assuming you averaged a $50,000 annual salary for those first eight years, you would have needed to set aside 40 percent of your pre-tax income in an emergency fund.

Are you saving 40 percent of your income for a rainy day?

No, you might say, but at least you’re saving 10 percent of your income. That’s good. Unfortunately, one year of disability could wipe out about 10 years worth of savings.

Without an emergency fund or other assets to fall back on, disabled individuals tend to rely on credit to get by. This usually includes credit cards, but people struggling with day-to-day expenses may also use short-term, high-interest loans.

The more outstanding debt you have at one time, the lower your credit score falls. In fact, your debt level determines about 30 percent of your credit score.

The higher the interest rate you pay on debt, the more it will lower your credit score. 

Credit rating agencies also evaluate the number of credit card accounts you have active. Plus, the higher the percentage of your credit limits you have used, the more it will negatively impact your credit score.

One of the first budget priorities people with a sudden disability often neglect is their student loan payments.

Credit agencies will not penalize you for a deferral or forbearance on your student loans. However, late payments and defaults have an immediate negative impact. The longer your payments are late, the lower your credit score falls. A default on student loans drops your credit score even more. 

Student loan defaults stay on your credit history forever, unlike other types of defaults that disappear after seven years. Also, student loans are nearly impossible to discharge through bankruptcy filing.

Even if you’re not the one who becomes disabled in your relationship, your credit rating can take a hit. 

If you default on a loan that is held by both spouses because one of you becomes disabled, it will negatively impact both of your credit scores. This includes a mortgage, car loans, and credit card accounts that are held in both of your names.

Did you know that 15 percent of bankruptcy filings are caused by an illness or injury to themselves or family members? According to the Council for Disability Awareness, another 20 percent are caused by a lost job and 26 are due to unpaid medical bills. 

If you have to file for bankruptcy due to a disability, the effect on your credit report may last longer than your disability. All bankruptcy-related accounts will remain on your credit report and affect your credit score for seven to 10 years.

If you’re fortunate, you’ll never have to deal with the physical and financial impact of a disability. 

But given the odds of it happening, it would be best to proactively plan to minimize the financial effects.

You can do this by investing in an individual long-term disability insurance policy.

Long-term disability insurance is designed to replace a portion of your income in the event an injury or illness limits your ability to work. 

You make regular premium payments to an insurance company. The cost is based on your profession, income, age, health, and other factors.  

In exchange for your premium, the company agrees to pay you contracted benefits if you suffer a disability that affects your income. The benefits replace some or all of the income you lost by being unable to work.

Having insurance benefits to cover your lost income means you don’t have to borrow money to pay bills. You don’t have to deplete your savings. You don’t have to default on your mortgage and loans.

You don’t have to compound your physical suffering by hurting your credit health. With Breeze, you can get a personalized disability insurance quote and apply for a policy completely online. Protecting your income might just be the easiest thing you do today.