How to manage credit card debt when unemployed

As a result of the ongoing Coronavirus Pandemic, many people are experiencing job losses, furloughs or reduced work hours. Even those who are still employed may fear facing financial hardship as the impact continues. This uncertainty can make it difficult to plan for the future, and to know which financial goals to prioritise.

A legacy of credit card debt when you’re unemployed can feel overwhelming. Interest rates on credit card debt are typically high. A failure to make minimum monthly payments can lead to default and lead to a shattered credit score. However, the good news is if you make the right moves, you can avoid the worst financial damage.

Here’s what you need to know about handling credit card debt if you’re unemployed or facing redundancy.

Contact your Credit Card Issuers

If you are experiencing financial hardship, your credit card issuer might be able to help. They can help by lowering your interest rate or reducing your minimum monthly payment.

Most credit card issuers offer some kind of hardship program to help consumers through periods of financial difficulty. Many issuers have created new customer assistance programs in response to the Coronavirus pandemic.

Depending on the company, it may agree to reduce your interest rates or minimum payments. You can also request for any fees to be waived, if you’ve already fallen behind and accrued late fees. Also, you can even ask for ‘forbearance’, which is a temporary hiatus from paying your bill.

Some credit card issuers offer payment protection plans. For an ongoing monthly fee it will allow you to pause making minimum payments in certain circumstances. However, these plans can come with a range of eligibility requirements and limitations, which may make them difficult to fully utilise.

Instead, consider setting aside the amount you’d pay for a payment protection plan in an emergency fund. So that you have the flexibility to cover bills when you need to.

Avoid Adding to Your Debt

This alone won’t get you out of debt, but at least your debt won’t get worse. If you continue adding debt, it will be much more difficult to make progress on reducing your debt. Reduce your temptation to create more debt by cutting up your credit cards or even freezing your credit.

But dealing with an unexpected period of unemployment, is an example of why it’s so important to maintain an emergency fund.

If you have cash saved, draw on those reserves to pay bills instead of adding to high interest credit card debt, which will only be harder to pay off later.

If you don’t have an emergency fund and can’t afford to pay for essentials, such as housing, during this time, consider taking out a personal loan – particularly from a local credit union. Personal loans may come with lower interest rates that your credit cards carry, and credit unions often have more lenient credit requirements than traditional banks.

Borrow the smallest amount you need to cover expenses during unemployment so that repaying the loan won’t add to your financial stress later.

Create a Monthly Budget

While unemployed, it’s important to make a budget that you’ll stick to that reflects your new financial situation. That means making decisions on what you need and what you don’t, to help you spend as little as possible while ensuring you meet your monthly obligations.

When you develop or revise your budget, divide expenses into mandatory and discretionary categories. Mandatory expenses – which include housing, food, utility payments – can’t be avoided.

Many discretionary ones, like dining out and attending movies, concerts or sporting events, can be avoided. Other discretionary expenses, including telecommunications connections, car payments and health insurance, can either be eliminated temporarily or cutback.

Track your spending to ensure you keep it within the limits you’ve set. Recalibrate if your goals were unrealistic or your budget in certain categories was too restrictive.

Once your situation changes and you are getting a regular pay-check again, don’t abandon your budget. Rework it taking your new situation into account, and stick to it. Adhering to a budget is one of the best ways to avoid overspending and reach your goals.

Keep Making Minimum Payments

Aim to continue making minimum payments on your credit cards and loans even when you’re unemployed. That way you’ll protect your credit score, which you’ll need to keep strong to get credit at competitive interest rates in the future.

Since payment history, is the most important factor in your credit score, a stretch of missed or late payments can have a significant negative impact on it. Consider minimum credit card and loan payments to be a necessary expense, like food and housing, as you create your budget.

Know You Have Options

It’s understandable if you feel anxious, confused and isolated when you’re in debt and unemployed. But help is out there.

Start with your creditors; then move on to self-help strategies like budgeting; and finally, seek assistance from trustworthy experts. This period of time will likely be temporary. Make sure that any strategies you use to handle debt will keep your finances as healthy as possible in the long term.

Start Job Hunting

Job-hunting you take priority during your unemployment. You may want to look for some of the temporary jobs available during this Covid-19 pandemic if no-one is recruiting for your normal career.

Let everyone know as possible that you are in the job market, don’t rely on the Job Centre to come with ideas for you:

  • Think about getting a LinkedIn profile – I recently secured a new job through LinkedIn from a direct recruiter, so don’t be put off by the pandemic and stay positive in your job search.
  • Smarten up your CV – get someone to look at if for spelling errors and to proof-read
  • Reconsider a career change if you are currently not enjoying your current job
Need help?

If you want help managing your debts there are numerous sources of free, independent advice and help.

Leave a Reply

Your email address will not be published. Required fields are marked *