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There may come a time when you have to handle an unexpected and extreme financial hardship. It could be a circumstance completely out of your control, such as the COVID-19 pandemic. In these situations, your reliable income may decline or disappear, greatly inhibiting your ability to meet all of your expenses and obligations.
Whether you're in this position now or think you may soon be, take heart. You can weather this storm by managing the problem calmly and systematically. To pay your credit card bills in an emergency, you'll need to assess how much money you have available, where you may be able to attain more and how to prioritize your debts. Here's what you need to know.
1. Contact Your Creditors
Paying at least the minimum on your credit card bills every month will help you avoid hurting your credit and keep you in good financial standing with your card issuers. But if that's not possible, call your card issuers now. Credit card companies recognize economic downturns, and often respond with assistance programs. For example, your credit card company may allow cardholders to skip payments without accruing interest for a certain time period. Help won't come to you automatically, though, so you must be proactive and contact your card issuers.
2. Seek Alternative Income Sources
Losing an income, even temporarily, is stressful. However, you can get through it by taking advantage of assistance and opportunities.
Unemployment insurance benefits are designed to partially replace lost wages. The amount you can get, if any, depends on your recent earnings, your employment situation and your state's formula.
Up until recently, the average weekly unemployment benefits ranged from $200 to $550, but the recently passed Coronavirus Aid, Relief and Economic Security (CARES) Act temporarily changed the unemployment insurance program to offer more assistance to workers facing challenges in the COVID-19 crisis. The Pandemic Unemployment Assistance program covers gig workers and independent contractors who don't usually qualify for unemployment compensation, and added $600 more per week (for four months) to regular unemployment benefits.
If you don't qualify for unemployment insurance or would rather not get it, start to identify alternative ways to earn money during this unique time. Your regular job may be on hold, but that doesn't mean there aren't other income-providing opportunities. Switch gears and actively pursue any legitimate money-making option that's sensible for you and your family:
- Research industries and companies that are hiring.
- Offer your services on such community sites as Craigslist and NextDoor.
- Search for jobs on employment platforms such as LinkedIn and Indeed.
- Ask colleagues if they know of any positions that have opened up.
3. Take Stock of Your Assets
One of the first things to know as you create a strategy to pay your credit card bills is exactly how much money you have, whether it's immediately accessible or not.
Take note of any money you hold in various accounts and investments. Even if you won't use these sources to pay credit card bills, it's important to know where you stand with the following:
- Checking and savings accounts
- Investment accounts
- Retirement accounts
- Equity in your home
After that, examine your personal surroundings. What you have inside and outside your home are also important assets, so start to assign conservative values to things you have but don't need. For example, maybe you have a second car that's fully paid off and rarely driven. Also consider furniture, sports equipment or jewelry that doesn't hold much value to you anymore.
While you'll only want to tap sources like your retirement account and investments if you're not able to make ends meet in other ways, it can be a comfort to know that if you do have a pressing financial need, you may be able to turn to what you have or can liquidate in an emergency.
4. Trim Your Budget
Budgets are living documents. What you had been spending before a financial emergency can and should change depending on the amount of money you have coming in today. Make a budget to free up as much cash as possible to put toward your credit card bills and other expenses. Hitting that goal may require some sacrifice, but it will also give you a sense of security.
Review your entire list of expenses carefully. Pinpoint critical line items, such as:
- Rent or mortgage
- Medical expenses
After you take into account how much you owe toward these monthly necessities, eliminate or reduce less vital expenses, with the knowledge that it won't last forever. To help ensure success:
Rally the troops. It's one thing to live close to the bone when only you are affected, but another when other people are in the picture. Involve your spouse or partner and your older children in the budgeting process. Band together and determine what you're all willing to give up to keep costs down.
Reassess savings. If you've been putting money aside in an emergency fund, that's great—it may help you through this period. But if you find you don't have enough to fund your savings and pay your credit card bills, you may want to reallocate some or all of your deposits until the situation improves. In some cases you may even reduce or suspend retirement plan contributions. Just remember to begin funding your account in full as soon as financially possible.
5. Consider Debt Consolidation
Bundling multiple credit card balances into a single personal loan or credit card could help you more easily manage payments and lower the amount you pay every month. When looking into consolidating your credit card debt, research rates and credit requirements on personal loans as well as balance transfer credit cards.
The Citi® Diamond Preferred® Card from our partner, for example, is a balance transfer credit card that offers 21 months of 0% APR on balance transfers and then an ongoing rate of 13.74% - 23.74% (Variable). That's one of the longest 0% Introductory APR periods available. All transfers must be completed in the first 4 months you have the card. With balance transfer cards, you typically won't accrue interest on the amount transferred during your introductory period as long as you're making the minimum payments. Keep in mind that these types of credit cards often require very good credit scores.
6. Get Help From a Credit Counselor
Nonprofit consumer credit counseling agencies exist to help people through hard financial times. They provide free budget and debt counseling sessions, and may recommend a debt management plan where you pay the credit counselor one monthly payment, and they in turn pay your creditors (there is a small monthly fee for this service). You can find an agency through their membership organizations: the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Prepare for a Better Tomorrow
When your financial situation improves, you'll want to be in as strong a position as possible going forward. For this reason, commit to the following actions:
- Borrow sensibly. Credit cards are payment tools best used for short-term debt. If at all possible, keep the balance to zero or very low. It may be tempting to charge what you can't afford to pay in cash, but avoid this unless absolutely necessary. When your situation improves, you don't want to be faced with huge bills that might be difficult to repay.
- Pay creditors on time whenever possible. Even if you can't delete your current debts, make an effort to pay at least minimum payments by the due date. It will not just safeguard your credit, but it will also establish positive relationships with your lenders. After your situation improves and you want to finance something at a lowest cost, you can hit the ground running.
- Monitor your credit report. Credit cards and loans will show up on your credit report, and you want them to reflect positive information. On-time payments coupled with a low credit utilization ratio (how much of your available credit you're using) will help. Understand what creditors report about your payments by taking advantage of Experian's free credit report monitoring. Then, if you spot anything amiss (such as evidence of fraud), you can address it swiftly.
After the dust settles and you are back earning as normal, you can do more than readjust your budget to where it had been—you can strengthen your entire financial picture. Save regularly, spend mindfully and charge only when you can easily manage the debt. Should there be another setback, whether it's minor or major, you'll be prepared to approach it with confidence.