On debt management plan, need credit card
Dear Debt Adviser,
I've been on a debt management plan, or DMP, for more than three years. I'm now thinking of getting a low-limit credit card because I'll be interviewing for jobs and would like an additional source of funds in case of car issues, etc. So here's my question: What happens if I apply for a new card now? I'd need a credit limit of no more than $1,000 for emergencies. Will I be rejected? If not, and I obtain a card and use it, will my debt plan change? At this point, will anyone care on the plan's end? I am hesitant to consider this, but at my age, I feel ridiculous asking my father to use his credit card.
For my readers who don't know what a debt management plan is, let me take a minute and explain. Creditors recognize some people can't make payments due to circumstances beyond their control. When a person has multiple creditors, getting all of them to agree to take less can be next to impossible. Therefore, many creditors allow nonprofit credit counseling services to offer a structured repayment plan with lower payments and interest rates that a person can afford as part of the counseling and budgeting process.
You are smart to ask this question before you apply for a new credit card. Taking on additional debt could mean it is less likely you would be able to successfully complete the plan. Also, a creditor will not want to accept lower payments if you are paying a new creditor higher payments. However, most debt management plans recognize you may need an active credit card, especially for business-related, reimbursable expenses.
To avoid any problems with your current creditors, I recommend that you contact your credit counselor and let him or her know that you need to use a credit card for business. Getting one just in case of emergencies won't fly. That's what savings are for. I have two suggestions for you: First, apply for a card with an issuer that is not included in your DMP. Second, get a charge card instead of a credit card, since it'll require that you pay the balance in full each month.
Be sure you have room in your budget to handle any new payments you may incur with your new card, or that they are reimbursable business expenses. Also set aside money each pay period for savings. Building an emergency savings account to use as an additional source of funds is the only way to be successful in the long run. Try putting half of any new income, such as a raise, promotion or tax refund, into savings.
One last thought for you: A debit card or a secured credit card (a line of credit backed by a bank deposit) can be used in almost all circumstances where you might use a credit card. The benefit of using these cards is you are using money from your bank account and not racking up a new balance that has to be repaid.
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