Coping with credit card debt when you’re laid off

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Many people are experiencing job loss, furloughs or reduced work hours as a result of the coronavirus pandemic — and even those who are still employed may fear facing financial hardship as the impact continues. This uncertainty makes it difficult to plan for the future and to know which financial goals to prioritize in the short term.

But when it comes down to paying the electric bill or making a payment on your credit card, the electric bill likely seems more important; still, missing credit card payments can cost you a lot of money and hurt your credit score.

Luckily, you have options. Credit card companies can help laid off cardholders through hardship programs designed to help make monthly payments even during a period of financial struggle.

If you are carrying credit card debt and facing unemployment, here’s what you need to know.

What to do if you lose your job and cannot pay credit card bills

If you’re having trouble paying your credit card bills after losing your job, you’re not alone. Credit card debt can feel overwhelming even when you are employed, and many people struggle to make ends meet after being laid off or furloughed. Here are some ways to begin managing your debt during a period of unemployment:

  • Make the minimum payment. If you can afford your credit card’s minimum monthly payment, keep making that payment for as long as possible. Minimum payments keep your account in good standing with both your lender and the three credit bureaus, and you won’t get charged late fees or penalty APRs for missing payments.
  • Contact your creditors. If you can’t make the minimum payment on your cards, contact the credit card issuer. You might be able to negotiate an agreement that temporarily waives your interest, allows you to postpone monthly payments or lets you pay off a portion of your debt in a lump sum. Many banks and lenders are currently offering special assistance to consumers affected by the COVID-19 pandemic, so don’t be afraid to call customer service and ask for help.
  • Consider debt consolidation. If you can consolidate your debts into a single monthly bill, you might find it easier to keep up with the payments. Balance transfer credit cards are designed to help you consolidate multiple credit card balances onto a single card, generally with an introductory zero percent APR period. This gives you the opportunity to make payments on your debt without worrying about interest charges. Use Bankrate’s balance transfer calculator to learn more, including how long it might take to pay off your debt in full.
  • Consider credit counseling. A reputable credit counselor can help you make a budget, create a plan for paying off your debt and direct you towards appropriate debt relief options.

Assistance from credit card issuers

If you are experiencing financial hardship, your credit card issuer might be able to 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, and many issuers have created new customer assistance programs in response to the coronavirus pandemic. If your lender does not have a clearly stated hardship program on its website, contact customer service to learn whether you are eligible for assistance.

You can find a complete list of each issuer’s current hardship offerings here.

What happens if you stop paying credit card bills?

If you find yourself unable to pay your credit card bills, try your best to make at least the minimum payment on time every month. By forgoing timely minimum payments, you’ll risk late fees and may be subject to a penalty APR, in which the credit card company raises the interest rate on your unpaid balance. Once a penalty APR is issued, it’s likely to last a minimum of six months even if you make your subsequent payments on time.

The longer-term impact of missing credit card payments is damage to your credit score. Regular, on-time payments account for 35 percent of your FICO Score, so do whatever you can to fulfill those obligations.

If you miss one payment, however, don’t assume the worst. Contact your credit card issuer, explain that you missed a payment, and ask if they can waive the late fee. Some credit card issuers automatically waive the late fee on the first missed payment, understanding that everyone makes mistakes now and then. Try to make up the payment within 30 days of the due date. Otherwise, you risk taking a credit score hit, calls from debt collectors — and if you continue to miss payments, your credit card issuer might even close your credit card account.

If you apply for a credit card hardship or forbearance program, you may be able to temporarily postpone your credit card payments. This won’t affect your credit score, as your lender will continue to report your account to the three credit bureaus as current. If you can’t pay your credit card bills after you lose your job, working on a plan with your issuer can protect your credit score.

Using credit cards while unemployed

Generally, you should not make a purchase on credit that you can’t afford to pay off. This means that if you are unemployed, you shouldn’t use your credit cards to cover the expenses you can no longer pay for in cash; instead, you should focus on budgeting and generating new sources of income.

However, many people do use their credit cards as a financial lifeline when they are unemployed, especially if they don’t have an emergency fund — and with long-term uncertainty looming, you may need to turn to credit when bank balances run low.

If you decide to use credit to cover the income gap during unemployment, remember that whatever you purchase now must be paid off later, with interest. Try to keep your credit card balances to a minimum.

Can you qualify for a new card while unemployed?

If you want to get a new credit card when you are unemployed, you have a couple of options.

The Credit Card Act of 2009 allows credit card applicants to include any sources of income to which they have “reasonable expectation of access,” including a spouse’s income or unemployment benefits. If your household brings in enough income, you might be eligible to qualify for a new credit card even while unemployed.

You might also consider a secured credit card. These cards allow you to secure a line of credit by putting down a deposit which generally acts as your credit limit. Secured credit cards may not give you much purchasing power, but they can help you build a solid credit history while unemployed.

Will filing for unemployment affect your credit score?

Filing for unemployment benefits will not affect your credit score. Your FICO Score is based on five major factors: payment history, credit utilization, length of credit history, credit mix and age of credit. Your employment status is not taken into account (though income may affect your credit limit or your ability to qualify for a new card) — as long as you’re able to maintain a positive payment history and avoid running up high balances on your credit cards, your credit score should remain stable.

Should you withdraw money from your 401(k) to pay off your credit cards?

If you are tempted to pay off your credit card debt by dipping into your retirement fund, remember that taking early withdrawals from your 401(k) comes with serious consequences. You’ll pay taxes on the money you withdraw, plus an early withdrawal penalty. These penalties might apply even if you take a qualified hardship withdrawal.

You should also think carefully before withdrawing from your 401(k) during a volatile market. When the stock market is down, your investments hold less total value than they may when the market rebounds. If you can leave your 401(k) alone during an economic downturn—like the panic resulting from the coronavirus pandemic — you won’t have to withdraw your money at a loss.

Plus, pulling money out of your 401(k) early means losing out on all the compound growth you could have earned over time and shortchanging your retirement fund. Some 401(k) programs allow you to borrow money from your 401(k) and pay it back over time, which is often a better solution than taking an early withdrawal.

Alternatively, you can withdraw your Roth IRA contributions (not earnings) at any time without penalty, although you’ll still miss out on the compound growth you could have earned if you left your money in the Roth.

Should you take out a home equity loan to cover your credit card bills?

Some consumers use home equity loans or home equity lines of credit to pay off outstanding credit card debt. This isn’t free money, of course; any loan you take on the value of your house will need to be paid back, with interest — and if your home isn’t already paid off, you’ll be making mortgage payments at the same time.

The big difference between a home equity loan and a home equity line of credit is that the loan arrives as a lump sum and the line of credit allows you to take on as much or as little debt as you choose, up to your credit limit.

Since home equity loans and home equity lines of credit generally offer lower interest rates than credit cards, borrowing against your home to pay off your credit card debt could save you money in the long run. However, doing so won’t completely solve your debt problem. If you don’t make timely payments on your home equity loan or line of credit, you could risk foreclosure — and if property values dip, end up owing more money on your home than it’s worth.

Should you consider a debt settlement program?

Debt settlement programs can help you manage your debt by negotiating a payment plan with your credit card companies. However, there are a lot of shady debt settlement companies out there (and all kinds of coronavirus-related scams), so do your research before you commit.

Remember that you can always call your credit card issuers on your own to request a lower monthly payment, a reduced interest rate or a payment plan that allows you to pay your debt over a longer period of time.

Bottom Line

Do your best to make the minimum payment on your credit cards each month, even when facing financial hardship, to avoid late fees, penalty APRs and credit score issues. Contact your credit card company to see if you’re eligible for hardship programs to reduce your monthly payments or interest rate.

While you might consider pulling money from your retirement fund or taking out a loan against your home to help pay off outstanding credit card debt, it’s better to solve your credit card problem by carefully budgeting and looking for new income sources when possible.

If you are considering using your credit cards to cover the income gap during a period of unemployment, remember that any purchases you make now must be paid off later, so don’t take on more debt than you can handle.

Lastly, remember that you are not alone. Many Americans are facing similar financial situations and it will take time for the economy to make a full financial recovery. Until then, take advantage of any unemployment benefits, stimulus programs or government aid available to you, work with your creditors to manage your current balances and do your best to keep your financial picture as positive as possible.