Let’s say you suddenly find yourself out of a job. What if you have credit card debt? And if you don’t, should you still use your card?
For starters, begin by acknowledging that your situation has changed. You won’t be bringing in the same amount of money, so your debt payment schedule is going to change. Hopefully, you have an emergency fund to see you through this period to help meet regular expenses.
Strategies for dealing with your debts
You will need to do the same thing that businesses do when they struggle: restructure their debt. They call all their creditors, tell them that things are bad, and get them to change the terms of their debt during this period. Just like in business, you may have secured creditors. Secured creditors get preference if a bankruptcy gets filed. Credit cards are unsecured. They go to the back of the line.
First, make sure you pay the minimums on all secured debts, like mortgages and car loans. If you default, you’ll lose that asset. Next, turn to unsecured debts like credit cards. Figure out how much needs to be spent to make the minimum payment on each card, which includes monthly interest charges. Then figure out how much the minimum payment would be without interest charges. Keep these two numbers handy.
Your ideal strategy, which will take some coordination, is to call each credit card and ask for a conference call that they all can join. Each card should have a decision-maker such as a supervisor on the conference call. On the call, you will explain your situation.
You’ll be surprised to know that your creditors prefer transparency and communication. They are much more likely to cut you slack if you are honest with them.
The ideal situation is to ask the group to drastically reduce your interest rate until you are back on your feet, even to 0% if need be. They’ll be reluctant because interest is correlated to risk. Riskier consumers are assigned a higher interest rate, not a lower one.
However, if your situation is dire, you should point out an important fact to all the issuers: If there is a real possibility that you will not be able to fulfill your obligation, then everyone will get stuck holding the bag if you file for bankruptcy. You need everyone to get on board with a revised payment schedule and interest rate. The alternative might be not being paid at all.
Short of a conference call, you can work with each card individually. Either reduce the interest rate, or get all interest deferred until you pay off the principal.
No debt? Credit cards can help
Perhaps you don’t have any debt, but are thinking about using credit cards to bridge the gap. Perhaps you think you may get laid off, but haven’t yet. This is a great time to try and get a 0% introductory rate card, so you can make charges at no interest for up to 18 months.
If you can’t get a new card, call your issuer and say that you are considering carrying a balance for a few months but have many cards to choose from. See if they’ll offer you an attractive rate and you can get them bidding against each other. In that case, it’s not a good idea to disclose that you are unemployed, as they’ll never give you a lower rate as your risk just increased.
Scaling back until your next job
Regardless, remember to cut your budget, dip into your emergency fund and considering visit a debt counselor. Desperate times call for cool heads. Plan out how much you will need to reduce your monthly credit card payments so that you are paying only the minimum. That’s not an ideal payment schedule, but losing your job wasn’t ideal, either.
Jobless man image via Shutterstock