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Laid Off With Credit Card Debt? What to Do Next

 
By Marcia Frellick
June 14, 2012

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After a winter of strong hiring and job creation, the spring employment picture took a dramatic downturn, according to the latest Federal Reserve numbers.

Accompanying that slump was a sharp pullback in credit card spending — down $3.4 billion in April, after two months of increases.

With headlines about the economy lagging, it’s no surprise that consumers are getting cautious about credit. Yet those who become unemployed with substantial credit card debt find themselves in an especially tough situation. After all, if you don’t have a job, how can you make a dent in what you owe?

Here are some tips for managing your credit card debt after you’ve lost your job.

Unemployment can be a debt wake-up call
Between December and February, the economy added 252,000 jobs a month, according to the Fed. This surge may have been due to employers doing “catch-up” hiring to make up for jobs lost in the recession, Fed Chairman Ben Bernanke told Congress’ Joint Economic Committee on June 7. Since February, job growth has dwindled to 96,000 a month, according to the Fed. That grim news continued in May when only 82,000 private sector jobs were added, according to the Department of Labor.

That bad news can be a wake-up call for those who were relying on an income to control their credit card debts, credit counselors say. Yet it doesn’t have to be a rude awakening. Honestly assessing your budget is a good strategy whether you’ve lost a job, are having trouble finding one, or even if you feel your job is safe.

The first thing to know, says Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies (AICCCA), is not to panic. A reputable credit counselor can help you set up priorities — and figure out where your credit card debt falls among them.

“Start with mortgage and car, but credit cards should be pretty close after that,” Jones says.

A counselor can also help you understand your credit card’s terms and take stock of your assets, liabilities and spending patterns so that you can continue to make payments.

Get a part-time job, and make some cuts
With your main source of income gone, consider getting a part-time job while you search for a new full-time job, Jones says. Also, quickly apply for unemployment benefits. These benefits vary by state.

“The average is only about $295 a week, but that’s $15,000 a year,” Jones notes.

Also take a hard look at any items you can sell– maybe you can go to one car instead of two, for instance. Then look for cuts you can make. Start with cable service, says Cynthia Hampton, a credit counselor with ClearPoint Credit Counseling Solutions in Memphis, Tenn. If you can’t cancel your service, look at reducing premium packages. Then consider canceling your land line, but make sure you have enough minutes on your cellphone so you don’t lose those savings in over-limit fees. Be ruthless in your cuts, Hampton says, and get others in your household involved.

Do’s and don’ts
Without an income as a cushion, debt slip-ups become much more damaging. Here are some guidelines to follow while you ride out your unemployment.

Do:

  • Contact creditors in writing. Be sure to use the address for correspondence listed on your statement, not the payment address. Write a letter telling the creditor of your situation, and make a copy.When you write the letter, make sure you know what you can afford to pay given unemployment benefits and expenses.”Don’t make promises you can’t keep,” Hampton says.Sometimes, creditors will put you on an in-house program for people who have lost income. They may reduce your minimum payment, reduce your interest rate or suspend over-the-limit fees.”Ask for those types of concessions,” Hampton says.Yet be aware that credit card companies may also reduce your credit limit if you admit you’re in trouble.
  • Stop using your credit card. There’s no point in trying to reduce the debt on one end and adding to it on the other. Use cash, checks or a debit card so that you spend only the amount in your bank account.
  • Avoid temptation: You know your weaknesses — walking past your favorite coffee shop, browsing the mall or considering the enticing deals for photography classes and pedicures that pop up in your email. Go out of your way to avoid shopping temptations and focus only on necessities. Disable pop-up ads or unsubscribe to daily coupon offers.

Don’t:

  • Ignore your creditors. “No news is not good news,” Hampton says. “They want to know what’s going on.”Keeping in touch with your creditors may keep them from sending your account to a collection agency, which can damage your credit score and subject you to aggressive phone calls.
  • Cash in your 401(k). Short of losing your home or declaring bankruptcy, the penalties are so steep for withdrawing before age 59-and-a-half, that you may not be able to make up that loss. That is always a last-resort option, credit counselors say.
  • Assume that landing a new job ends the struggle. Jobseekers often make that mistake, Jones says. But in this economy, a cut in pay in the next job is often the reality. So look for cuts in your budget that you can sustain for the long haul.

Cutting back on expenses and building an emergency fund is a good idea even if you’re not currently worried about losing your job.

“If you have a job you feel is secure, it’s time to start paying extra principal on that house, it’s time to start making extra car note payments … and it’s time to start increasing your savings so you can build wealth,” Hampton says.

She suggests starting small, with tiered goals. For example, make a short-term goal (like having $1,000 in savings a year from now); a mid-range goal (like paying off your car note in three years instead of five); and a long-term goal (like paying off your house in 15 years instead of 30).

 


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