Unemployment can come as a surprise to you, especially if you owe debt. Although job loss is a familiar situation, people often fail to brace themselves for unexpected layoffs. Unless you land a new job, you will have to dip into your savings and unemployment benefits available for a particular duration and only when you meet the set criteria. Unfortunately, there are people who do not have an emergency cushion to fall back on either.
A larger number of population banks on credit cards and therefore you are most likely to have credit card bills to be paid off when you lose your job. To your dismay, under no circumstances can you wriggle out of credit card debt. So, as soon as you lose your job, the next thing you should do is to take the following steps:
Contact your credit card providers
Do not assume that your credit card provider will not give you a helping hand just because they are bothered about their payments, and they want it by either hook or crook. No sooner do you lose your job than you talk to your creditors. The sooner, the better. They must be able to have clarity about your financial condition. They are obliged to cooperate with you, especially if it is not a consequence of your mishandling.
They are likely to defer payments lower their interest rate, or make smaller payments. Whatever the plan they propose to you depends on your current financial condition and their policy. However, watch out for the drawbacks, too. They can freeze your card to restrict you from using it further unless you land a new job, or they may lower the limit. Choose the plan that suits you best.
Keep paying a minimum balance
Sometimes, you will be given advice to keep paying a minimum balance every month, and perhaps that will be only a suitable option. You might be tempted to pay more than the minimum balance, but you should not. Free up your cash as much as possible so you do not struggle with rent payments, utility bills, mortgage payments, and car payments. The financial future hangs in the balance, so having cash at hand is more important than trimming down your credit card debt.
Paying a minimum cash balance will help you avoid default charges, but at the same time, interest will accrue on the unpaid balance. The total debt amount will quickly add up. Be prepared to face that situation as soon as you land a new job.
Do not ignore the budget
Sometimes no help is better than self-help. As you are in a tight spot, it becomes more vital to have a functional budget. First off, you need to find out how much cash is available with you and how much you have to spend.
- Create a list of all of your expenses like utility bills, groceries, personal care, and meals. Jot down both essential and discretionary expenses.
- Determine your income by clubbing unemployment benefits, savings and passive income sources.
- As you are out of work, the 50/30/20 rule cannot work this time. Just remove all discretionary expenses. You can manage without them unless you land a new job. Stick to essential expenses.
- Deduct them from your total income. The rest of the money will be utilized to pay off your credit card debt. Do not use the whole of the money. An emergency cushion is still intrinsic in case you are caught unaware by unforeseen expenses. Taking on unemployment loans for bad credit can be challenging. If not, handling both debts can be difficult.
- Keep tabs on your spending, so you do not spend beyond the bounds of the limit your budget has set.
Consolidate or refinance your credit card debt
You may prefer to consider a debt consolidation loan or refinancing when you have insurmountable credit card debt. However, it is quite arduous for a direct lender to sign off on your application for a personal loan unless you have a stable income source and a decent credit score.
If you have a passive income source and have a good credit rating, you may qualify for a consolidation loan, but balance transfer credit cards are a better alternative. Your chances of approval are quite higher if your credit rating is good. You can avoid paying interest if you clear the whole balance within a stipulated timeframe. However, if you fail to do it, you will end up paying a lot more interest.
Other things you must know
Here are some of the queries that unemployed people often ask:
- Should I pay off my cards if I am out of work?
Yes, you should if you can afford to. Make minimum payments without struggling with food, shelter and utilities.
- Should I use my card when I am unemployed?
It does not make sense to use your credit card when you are out of work as you are already in debt and you do not know how long it will take to land you a new job. In case you need money for unavoidable reasons, you should compare the credit card cost with loans for bad credit online and choose the one that is less expensive. It is suggested that you take help from your friends or family.
- Should I withdraw from a 401(K) account if I am jobless?
It is strongly advisable that you never withdraw money from 401(K) or IRA as early withdrawals will result in tax penalties. Withdrawing your retirement funds will open doors to financial woes in the future.
To sum up
Having credit card debt is very common but tit nags when you are unemployed. Being jobless does not allow you to escape payments. Talk to your creditors and tell them of you financial condition. You are more likely to get a plan that works best for your financial condition.
Do not try to mess with your credit card debt. You might stop making payments. This will continue to accrue interest and penalties. As a result, the amount will continue to mount up. Credit card companies cannot take away your house, but they can sue you for making a default.
Credit cards should be used sensibly. Aim at not to use more than 25% of the limit at a time and it lets you pay down the balance in fixed instalments.