Shaky job? 7 ways to manage your credit
October 3, 2011
By: Geoff Williams
Credit cards are never more dangerous than when you're unemployed. Of course, if you're underemployed, they're rather dicey as well.
If you don't dread carrying credit card debt and being unemployed, you can always ask someone who's part of the 9.1 percent of the labor force that's out of work. It's simple math. When your income is dropping, and your debt is growing, the outcome is never going to be pretty.
So if you suspect you could lose your job, or if you've just been given walking papers, aside from dealing with the shock, scrambling to get your resume updated and wondering what the future holds, it's imperative to think through how you're going to manage your credit cards. Because while they can be your best friend when you're unemployed, they can also be your worst enemy.
Here are some strategies for managing your credit cards if your job is in jeopardy--or beyond:
Pay down debt while you can. If you've already been working on paying it down, you're a step ahead. Obviously this is easier said than done for some people--those who look at their paychecks and think, "This would be a lot of money if the year was 1956." But if there's any time to start paying it down, it's now, while you still have an income.
John Tilley, director of marketing and outreach at the Washington Area Teachers Federal Credit Union in Washington, Pa., advises that if you expect to receive severance pay and unemployment benefits, it's better to shovel money towards your debt rather than into your savings account.
Build your emergency fund. That said, don't go overboard paying your credit cards if you can't afford to. Alexa von Tobel, founder and CEO of LearnVest.com, a personal finance website, points out that an emergency savings account is vital, especially when you're unemployed. "Hopefully you already have one," she says.
While it's important to pay down your debt, be careful to leave money on the table for unexpected needs so you don't have to reach for the credit cards to cover costs.
Transfer your balance to a low-APR card. If there's ever a time to do this, it's before you lose your job. "If you can roll over your money to a credit card that has a zero interest rate for an introductory period, that can allow you maybe 9 or 12 months to catch your breath and not have to pay as much of a monthly balance," von Tobel says.
"If you're not earning money for a time, your cash is going to be very dear to you," Von Tobel adds.
Tell your credit card issuer that you've lost your job. If you're already in financial trouble or can see it looming ahead, Tilley suggests you seek help. He reasons that your friendly neighborhood bank can help you reduce your payments and, in some cases, may be able to suspend payments for a while. In addition, the bank may be able to steer you to a reputable credit card nonprofit organization, which should be able to help you negotiate payments with your credit card issuers.
Don't tell your credit card issuer you've lost your job. Huh? Well, not yet, not right away, because you want to think this through. Once you give any hint that your job is in trouble or nonexistent, you might as well kiss your credit card goodbye. That really may be for the best, if you're carrying debt and very little income is going to be coming in.
But if you expect your career setback to be temporary, and you feel you will be able to manage your credit, the bank won't care as long as you stay current on your payments. That's certainly your judgment call. But bear in mind that if you think it's no fun being in debt and employed, wait until you try being in even deeper in debt and unemployed.
Don't use your credit cards to maintain your current lifestyle. It's common sense to any level-headed person, but if you've just lost your job, you might not be level-headed right now. You may be panicking, in denial, or simply trying to cushion your family from having to sacrifice. But your credit cards need to be used for emergencies and necessities, not for eating out and going to the movies.
You know that, but it can be hard to remember, according to Gerry Patnode, assistant professor of management and chairman of the Department of Business at York College of Pennsylvania. His work has introduced him to many unemployed business people, and he says that's a common failing among the unemployed. Which brings us to the next point:
Think twice before you start a business with your credit card. Patnode says that he knows many people who have lost their job and then tried to improve their lives by funding a new business with their credit cards. Yes, it can work, acknowledges Patnode, but mostly these stories become "disasters."
The problem, Patnode says, is that usually "the unemployed person says, 'Well, I need to get business cards, and stationery, and I need to look like I'm a business,' and they'll file for state licensing, and it all piles onto the credit card. Unless you have something hot, and people are sending you checks in the mail, you have to resist that. Usually, it can take a new business a year just to break even." And the statistics for startups surviving the first year are not encouraging.
He suggests funding a new business through contributions from friends and family, or a supportive vendor who can float your business a loan.
Only you know your own situation--your income, your job prospects, the interest rate on your card, how much debt you're carrying, your expenses. Without detailed knowledge of your situation, it's impossible for any personal finance expert to say definitively, "Here's what you should do."
Don't panic if your debt begins to overwhelm you. Being in debt isn't a pleasure cruise, and, yes, it's going to hurt seeing your credit score crumble, but your credit cards are pretty insignificant compared with the important things in life like feeding your family and keeping a roof over everyone's head. If you already feel at sea, consider Tilley's advice and ask for help. Better to lose your credit cards than your peace of mind and your health. You can always get your credit cards back when times are better.
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