Unemployment and Credit Card Debt
Being unemployed is stressful enough, but adding credit card debt into that equation can compound your worries. Fortunately, you have options and a free credit counseling session can help you discover ways to deal with debt while unemployed.
Choose Your Debt Amount
Handling Credit Card Debt While Unemployed
A strange thing happened when the COVID-19 economic shutdown hit the United States -- millions of Americans did NOT go further into credit card debt.
A familiar thing is happening now that the economy is recovering. Millions of Americans are going further into credit card debt.
Sadly, there is no vaccine for credit card debt. You need to protect yourself, and the first step is to recognize the enemy.
When money is tight, it’s tempting to have a credit card company throw you a lifeline. But it’s really more like tossing an anchor to a drowning man or woman.
The culprit is interest rates, which averaged 16.3% in June, according to the Federal Reserve. That’s five times more than a typical mortgage rate these days. And most credit card companies compound interest daily, meaning more interest is added to the principal every 24 hours.
You can end up paying as much in interest as you did for the item you purchased. That treadmill seemed to have largely gone out, but now it’s back.
What’s going on?
Belt Tightening Loosens Up
Credit card debt was expected to skyrocket when the pandemic hit and the unemployment rate jumped to 14.7% in April 2020. But total credit card balances fell from $927 billion in the fourth quarter of 2020 to $770 billion in the first quarter of 2021.
Analysts think the drop was due to the torrent of federal stimulus money that was a five-figure windfall for some families. Between that and enhanced unemployment benefits and forbearance policies, Americans were able to pay off a lot of debt.
But now that the economy is stabilizing, demand for credit cards has gone back up. There were 6 million new credit card openings in March 2021, according to Equifax. That was the highest March figure on record and 32% more than March 2020.
People are spending more, but a lot of them are doing it with money they don’t have in the bank. That comes as COVID financial relief is drying up.
About half the states have cut off the $300 a month in additional unemployment benefits the federal government was providing. That supplement will end for everybody on Sept. 6.
The Centers for Disease Control’s moratorium on evictions expires Oct. 3. The pause on repaying student loans ends Jan. 31, 2022. Those federal dates might change, but the benefits bonanza will eventually expire.
Credit card bills have no set expiration date. It’s up to you to make one. Here are some ideas that should get you started in that direction.
Enroll in Creditor Hardship Programs
Credit card hardship programs are an option. Though credit card issuers don’t advertise these, some companies are willing to lower your required minimum monthly payment if they think it will stop you from defaulting.
Be aware that entering a hardship agreement probably will be entered in your credit history and likely will lower your credit score. Seeking this kind of relief is typically a last resort, but worth considering if you can’t afford minimum payment.
Mortgage lenders and auto lenders often have hardship programs as well. You can sometimes learn about which lenders offer hardship programs through online research.
Finally, if you have a student loan, contact the servicer to see if you can temporarily suspend payments.
Make a Budget and Prioritize Expenses
You’re not the first person who’s been in this fix. The ones who’ve weathered it the best, start by making a budget that reflects their new financial situation. On the expense side, it’s time to cut back spending. That means make decisions on what you really need and what you really don’t.
When you develop or revise your budget, divide expenses into mandatory and discretionary categories. Mandatory expenses — which include housing, food, utility payments – can’t be avoided. Many discretionary ones, like dining out and attending movies, concerts or sporting events, can and should be cut. Other discretionary expenses, including telecommunications connections, car payments and health insurance, can either be eliminated temporarily or cutback.
Mortgage or rent needs to be paid. If you can take in a roommate, however, you could save money on rent or offset your housing costs. You could negotiate with your landlord, offering to do maintenance work or find tenants to fill empty units in exchange for reduced rent. If you’re a renter, you might consider moving to a cheaper place or even moving in with parents or other relatives during you time out of work. If you own your home, the problem is tougher since mortgage lenders typically want timely payments. During a emergency like the Covid-19 pandemic, government programs might allow you to miss rent or mortgage payments temporarily without facing eviction or foreclosure, but that’s a temporary – and not terribly effective – method of dealing with the problem.
Reduce energy consumption to save on utilities. If it’s summer, raise the thermostat on the AC. In winter, wear sweaters and lower the temperature. You can also turn down the thermostat on your water heater and take shorter showers, which will cut both electric and water bills. For information on energy saving, contact your utilities or a government agency that offers conservation tips.
Food is an area where most people, when pressed, can find tremendous savings. Eating out? Forget about it. Americans spend almost 40% of their food budget eating out. Stay home. Wipe off the stove top and clean the microwave, because you’ll be using them more than you have for a long while.
Another way to save money on food is to check if you qualify for the Supplemental Nutrition Assistance Program, known informally as food stamps. SNAP can significantly lower your grocery bills, though restrictions apply to what you can buy.
Make sure you consider health insurance. If your former employer offers an affordable extension of your work plan, consider that. The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) allows the newly unemployed to continue their group coverage, but usually without the company subsidy that made the insurance affordable. If COBRA coverage costs more than you can pay, consider looking for a plan through HealthCare.gov.
You’re going to need wheels to get to job interviews, but you might be able to save money on auto costs by enrolling in your auto lender’s temporary hardship program. If your car payment is unaffordable, you can surrender it and look for an inexpensive used car, though that option is drying up fast. Used car prices were up 30% from June 2020 to June 2021. The values of some used cars actually have increased in the past year, something that hasn’t happened in most people’s lifetime. Still, used cars can be more affordable that driving one that was new a year ago so look around.
Phone and Cable
You need a cellphone for job searches and morale-boosting talks with family and friends, but you might not need a plan with unlimited data and international calling. See if you can cut back options. Even if you are locked into a contract, you might qualify for a hardship plan with your carrier that suspends expensive options while you are unemployed. Also, ditch your land-line phone if you still have one.
The same goes for cable TV. Consider cutting the cord and watching streaming videos instead. You might discover removing TV from your life will mean more time for what matters, like finding work. If life without cable seems unbearable, drop the premium channels. Save money on internet by applying for a low-income subsidy.
Services, Subscriptions and Other Expenses
Suspend household services and do the work yourself. You have extra time when you’re out of work, so mow that lawn and clean the house yourself. If you have a pool, learn how to maintain it. Trim subscriptions. Suspend the newspaper and ax the premium subscription to Spotify or Pandora until you have an income again.
Apply for Unemployment Benefits and Other Government Assistance
If you qualify for jobless benefits, apply for them.
Food stamps and school lunch assistance can also save money that you’ll need for other critical expenses. Though many of us resist seeking government help, if you have a genuine need, remember that the programs were designed to help people like you navigate rough patches.
Avoid taking cash advances or signing up for financing plans during your time out of work and avoid using your credit cards, especially if you have unpaid credit card debt.
Bad Credit & Unemployment
Past credit problems could hurt your chances of landing a job.
The federal Fair Credit Reporting Act allows employers to pull credit reports on their employees and job applicants as long as they get written authorization from the person being checked.
Although more than 70% of organizations check some job applicants’ credit, only 29%of applications to those companies are ever given credit reviews. They have a variety of reasons for doing this, including an assessment of your competence handling money, your ability to make sound judgments and even the likelihood you might commit a financial crime.
If you are concerned about a potential employer’s request to review you credit report, you should consider contacting a nonprofit credit counselor for advice.
Credit Card and Unemployment Frequently Asked Questions
Credit card debt is a millstone that can drag you down during a stint of unemployment. It is important to either eliminate it or create a plan to manage it while you are living on greatly reduced income. This won’t be easy to do, especially if you had a hard time managing debt while you were employed. If you need help creating a plan, consider seeking assistance from a nonprofit credit counselor like InCharge.org.
Nonprofit credit counselors can offer useful advice for paying down debt with reduced income, often at little or no cost to you. Counselors can also coach you on how to explain your situation to creditors and inquire about relief or hardship programs that might make paying off debt easier. If you discover that you can’t resolve your debt problems yourself, the credit counselor might suggest a debt management plan that negotiates with creditors, consolidates debts and supervises payments.
Here are some questions that unemployed workers often ask:
Yes, if you can afford to. If you can afford the minimum payments (as well as food, shelter and utilities), then you should absolutely pay your credit cards during unemployment.
Be very careful about using your credit cards. It’s tempting to take on credit card debt expecting to pay it off later. Problem is, you don’t know how long “later” is going to take. Taking on new cards or not paying off your balance at the end of the month can be extremely costly if you don’t get a new job quickly. Best suggestion? Stop using credit cards and avoid taking cash advances or signing up for financing plans until you find work. Also, avoid using your credit cards as cash machines. While you might find such options tempting, high interest credit card debt can create more problems than they solve.
No. If you pull money out of tax-deferred retirement plans like 401(k)s and traditional IRAs, you could face sizable tax penalties for early withdrawals. Worse still, you will be depleting accounts intended to fund your retirement, opening the door to future financial woes.
Again, it’s important to consider the consequences and try to avoid early retirement-account withdrawals.
A low-interest home equity loan or line of credit may be the right solution for you but be careful. If you find yourself heading toward bankruptcy, your primary residence may be exempt, in which case you are putting your home at risk needlessly. It is difficult to qualify for a home equity loan or line of credit, however, without reliable income. You’ll also need a good credit score to qualify for the best interest rates.
If your unemployment persists and you are not able to pay your bills, bankruptcy may be a viable option for you. Bankruptcy is a serious step that can cause long-term damage to your credit. Before filing a petition for bankruptcy protection under Chapters 7 or 13, make sure you understand the consequences. Bankruptcy might relieve your immediate financial pain and might be the only viable option, but approach it cautiously.
Seeing a nonprofit credit-counseling firm like InCharge should prove very helpful in creating a plan to deal with disrupted finances. Credit counseling can help you design an emergency budget that helps you allocate your money to cover expenses. You will need to rank priorities and pay essential expenses first. If you had credit card debt before you lost your job, a counselor might recommend a debt management plan that consolidates debt into a single monthly payment. The plan will allow you to pay off debt in three to five years.
Consider debt settlement only if you have enough money in a bank account to settle your debt (usually about 50% of the debt). Don’t allocate money towards a debt-settlement stockpile if you anticipate having problems paying for the basics: food, shelter and utilities. Debt settlement might be a path for you after you’ve found a new job and have the income to tackle your debt.
Most people want to pay their bills on time and take pride in doing so. The thought of not paying can cause panic. But here’s the good news: Credit card companies are limited in what they can do if you default on your debt. They can’t take your house or car away. They can’t garnish your unemployment check (government income is exempt from liens). They can’t put a lien on your wages, because you don’t have any.
That said, creditors aren’t toothless. They can, and often do, sue those who default. If you are sued for credit card debt, immediately review the filing to make sure it’s accurate. Often the plaintiff isn’t the credit card company but another a collection agency that bought your debt and will try various tactics, including a lawsuit to recoup at least part of what you owe. If you determine that the lawsuit is accurate, you need to defend yourself, which means you likely will need a lawyer.
If you get calls from your creditors, calmly explain that you’ve lost your job and you’ll catch up once you’re re-employed. Sometimes you can stall and reach a settlement agreement before a suit is filed.
About The Author
Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.
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