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How to Handle Credit Card Debt While You’re Unemployed

June 23, 2015
Credit Card Basics, Credit Cards
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Losing your job is stressful enough, but when it’s coupled with high-interest debt, it’s downright punishing.

Financial stress can drive big, potentially destructive decisions. For instance, you may consider draining your emergency or retirement savings to pay off your debt, or you might want to declare bankruptcy.

Before you get too frustrated, though, step back, take stock and devise a plan. You don’t have to take these drastic steps, and you probably have less painful options, including:

Keep your cash

If you don’t have another job lined up, it’s important to keep some cash reserves. Hang on to your emergency fund or severance check while searching for your next job and make only the minimum payments on your debt balances. You’ll need cash so that your daily expenses or an unexpected emergency don’t force you to add charges to your credit cards.

Communicate with your creditors

Call your creditors right away. They may be able to lower your minimum payments, move your due date or even suspend your payments temporarily.

It’s important to be honest and present potential solutions when talking to your lenders. For creditors, not getting paid in full and on time isn’t ideal. But communication will make them more likely to be flexible and allow them to get at least part of what you owe.

You should also check to see if any non-credit-card payments can be deferred. While it’s highly unlikely that your mortgage lender will allow you to slide on payments, student loans can often be deferred during periods of unemployment. Defer what you can and pay the minimums on everything else.

Tighten your budget

You probably have discretionary expenses in your budget that can be cut until you land a new job. Targets might include costly entertainment, prepared or convenience foods, hobby expenses and travel.

This doesn’t mean that you need to live like a hermit and abstain from having fun. Choose less expensive alternatives to things you love, like seeing free shows in your community instead of paying for concert tickets, or cooking your favorite restaurant meals at home.

This is also a good time to cut back on things you don’t want in your budget anyway. Cancel subscriptions you aren’t using, call your bank and negotiate fees, learn how to do something that you usually pay for, or get rid of your car if you live in a bikeable, walkable or public transit-friendly place.

Cutting expenses is great, but you should also aim to increase your income. Use your skills, sell your stuff or look for temporary work to bring in extra cash. Check out this list of moneymaking and expense-trimming ideas to create room in your budget.

If you have savings and your budget has some room, feel free to increase your credit card payments. Minimum payments are fine as a short-term solution, but progress is slow and expensive if you pay only the minimums in the long run.

» MORE: How to pay off debt

Avoid expensive financing

Money may be tight, but try to steer clear of pricey financing options, including charging more on your credit cards, taking cash advances and opting for payday loans.

If you need extra cash, consider taking out a personal loan or borrowing from a loved one. You’ll want to limit the amount to the bare minimum you need to get by until you’re employed again. Also, it’s important to make sure the payment terms are realistic so you don’t hurt your credit.

The bottom line: Dealing with credit card debt and unemployment simultaneously is tough, but you can make it easier. Hang on to your existing cash reserves, talk to your creditors, adjust your budget and try not to succumb to the lure of easy but expensive money. Once you’re employed again, make a plan to get rid of your debt so you never have to deal with this situation again.

Erin El Issa is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @Erin_Lindsay17.

Image via iStock.