Editorial Policy

Unemployed? Credit Card Do’s and Dont’s During Financial Hardship

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By Eva Norlyk Smith, Ph.D.
May 22, 2009

During times of economic hardship, your credit cards can be your friend or your foe—depending on how you play your cards, so to speak. Whether you’re facing unemployment, a long-term health issue, or loss due to a fire or natural disaster, savvy planning can make a big difference between whether you sink or swim.

Here are some important credit card do’s and don’ts to help you through a period of unemployment or other financial crisis.

Do pay all your bills on time. This doesn’t just refer to your credit card bills, but your phone bills, utility bills, and so on. If your credit card agreement includes the so-called universal default clause, your credit card company has the right to hike your interest rates if you are late paying any bill, not just your credit card bill with that company. High credit card interest is something to stay clear off at any time, but even more so during times of financial hardship.

Do use your available cash to pay off your bills. Save whatever precious cash you have available to make minimum payments on your credit cards and to pay off your bills. That may mean that you will have to charge your most essential living expenses on your credit cards. While this is something we would never normally advise, a financial emergency is different. Making short-term use of your credit to float you until you’re back on track can make sense—if it’s part of an overall plan and if you charge only the most essential expenses.

Do keep your credit card balances below 50 percent. If your credit card balances exceed 50 percent of the available limit on any of your credit cards, it will lower your credit score. This in turn may put you on card issuers watch list, and cause them to cut your credit limits and/or raise your interest rate.

Don’t cancel any of your credit cards. One third of your credit score is based on how much of your available credit you are using. Cancelling credit cards will change that ratio and lower your credit score.

Do take out one or two new, low interest credit cards. If your credit is good, apply for one or two low interest credit cards to increase the credit you have to draw on and avoid maxing out your existing cards. Only do this once, and only do it if your credit score is high, as applying for credit cards will lower your credit score slightly.

Do seek ways to lower the interest rates on your credit cards. Look for balance transfer offers to consolidate your credit card debt at a better rate. If you have good credit, you may be able to negotiate a lower interest rate with your credit card company by threatening to transfer your balances elsewhere.

Do look for other sources of financial assistance. If you need assistance while unemployed, there may be assistance programs available to help you pay for utilities, heating, and more. Many utilities and phone companies offer some payment assistance or plan. For other types of assistance, contact the national referral line by dialing 211, or Google 211 plus the name of the state in which you live (e.g., 211 New York).

Do defer your student loans. Most lenders will allow you to suspend payments on your student loans should you become unemployed. Contact your lender and see you qualify.

Don’t make extra payments on debt. While this may seem counterintuitive, when you’re unemployed, the rules are different. You don’t know how long you’ll be unemployed, so you need to do everything to conserve your cash. If you have been making extra payments on your mortgage or credit cards, put that money into a savings account so you’ll have a cash reserve to draw on later, should you need it.

Do seek help. If it becomes clear that you won’t be able to meet your obligations with the limited means available to you, do look into working with a professional debt counselor to help you create a budget and find ways to cope. Likewise, if it looks like you’ll have difficulty paying essential bills, like your car or mortgage, contact your lender and see if you can negotiate temporarily reduced payments.