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How to Manage Credit Card Debt If You’re Unemployed

Managing debt while you're unemployed adds a layer of stress to difficult circumstances. But skipping payments will lead to more trouble in the future, including a shattered credit score.

Instead, ask your credit card companies for help, which could come in the form of lowered interest rates, reduced monthly payments or a temporary break from payments. All of these options can help you continue to pay down credit card debt even on a strict budget.

You also can get help negotiating with creditors from a nonprofit credit counseling agency. But take caution when looking into certain debt relief options, including debt settlement. Here's what you need to know about handling credit card debt if you're unemployed.

Contact Your Credit Card Issuers

As soon as you know you'll have trouble covering minimum credit card payments, ask your credit card issuers for help.

Depending on the company, it may agree to reduce your interest rates or minimum payments. If you've already fallen behind and accrued late fees, request that those fees be waived. You can even ask for forbearance, which is a temporary hiatus from paying your bill.

When you're honest and share that you're experiencing a temporary financial setback, your credit card issuer may come through as an ally. Having a long history of on-time payments with the company could also be an asset. If the issuer isn't willing to work with you, ask other lenders for assistance: You could qualify for a modification program through your student loan or mortgage lender, for instance, freeing up money for credit card payments.

Some credit card issuers offer payment protection plans, which, for an ongoing monthly fee, will allow you to pause making minimum payments in certain circumstances. But these plans come with a range of eligibility requirements and limitations, which may make them difficult to fully utilize. Instead, consider setting aside the amount you'd pay for a payment protection plan in an emergency fund so you have the flexibility to cover bills when you need to.

Avoid Adding to Your Debt

It may be tempting to use credit cards to pay for essentials when you're not earning income. But dealing with an unexpected period of unemployment is an example of why it's so important to maintain an emergency fund.

If you have cash saved, draw on those reserves to pay bills instead of adding to high interest credit card debt, which will only be harder to pay off later on. Avoid dipping into your 401(k) or individual retirement account: Retirement accounts are meant to house long-term savings that grow over time. Withdrawing money means you'll lose out on investment gains that could make a significant difference to your account balance in retirement.

If you don't have an emergency fund and can't afford to pay for essentials, such as housing, during this time, consider taking out a personal loan—particularly from a local credit union. Personal loans may come with lower interest rates than your credit cards carry, and credit unions often have more lenient credit requirements than traditional banks. Borrow the smallest amount you need to cover expenses during unemployment so that repaying the loan won't add to your financial stress later on.

Create a Monthly Budget

While unemployed, make a budget that you'll stick to. This can help you spend as little as possible while ensuring you meet your monthly obligations. Here's how:

  • First, list all your expenses by category, such as housing, utility bills, groceries, meals out and personal care. Include all your regular fixed expenses as well as discretionary spending.
  • Determine your take-home income. This may be your unemployment pay or your spouse's income if you don't have any source of income during unemployment.
  • Decide how much of your income to put toward each category—perhaps by using a strategy like the 50/30/20 rule, which recommends spending no more than 50% of your income on necessities, 30% on wants and 20% on savings and debt payoff.
  • Identify categories where you can cut back. It's likely hard to change your housing payment in the short term, for instance, but perhaps you can limit spending on meals out or subscription services.
  • Track your spending to ensure you keep it within the limits you've set. Recalibrate if your goals were unrealistic or your budget in certain categories was too restrictive.

Once your situation changes and you are getting a regular paycheck again, don't abandon your budget. Rework it taking your new situation into account, and stick to it. Adhering to a budget is one of the best ways to avoid overspending and reach your goals.

Keep Making Minimum Payments

Aim to continue making minimum payments on your credit cards and loans even when you're unemployed. That way, you'll protect your credit score, which you'll need to keep strong to get credit at competitive interest rates in the future.

Since payment history is the most important factor in your credit score, a stretch of missed or late payments can have a significant negative impact on it. Consider minimum credit card and loan payments to be a necessary expense, like food and housing, as you create your budget.

Work With a Nonprofit Credit Counselor

If budgeting and identifying strategies to deal with debt becomes overwhelming on your own, seek out help from a reputable nonprofit credit counselor.

Agencies affiliated with the National Association for Credit Counseling, for instance, have trained counselors on staff who can assist you in making a basic budget and considering your options for paying credit card bills on a tight income. Your first hour-long consultation—which may be all you need—is free. Credit counseling agencies also offer debt management plans: These require you to make one monthly payment to the agency, which negotiates with creditors and pays them on your behalf.

But don't confuse debt management with debt settlement, which is offered by debt relief companies that counsel you to stop paying your creditors. That can hurt your credit score and lead to costly fees. When you're feeling stressed during a period of unemployment, avoid agreeing to a debt settlement plan that could cause long-term harm. Working with a well-regarded nonprofit credit counseling agency is a safer bet.

Know You Have Options

It's understandable if you feel anxious, confused and isolated when you're in debt and unemployed. But help is out there.

Start with your creditors; then move on to self-help strategies like budgeting; and finally, seek assistance from trustworthy experts. This period of time will likely be temporary. Make sure that any strategies you use to handle debt will keep your finances as healthy as possible in the long term.

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