Editorial Policy

What to do when you have no job and student loans

Erica Sandberg

August 5, 2014

QHi Erica,

I am in trouble and hope you can help me. I got into a car accident in June and everything went south from there. I broke my wrist in the accident and totaled my car that my parents gave me for college graduation. I lost my job. I owe $22,000 in student loans and have a maxed-out credit card of $1,000. I do not want to move back in with my parents, but I can't afford my part of the rent (I have three roommates). I'm looking for a job. What should I do about my loans and credit card? I can put my roommates off for a while, I think. –Eric

ADear Eric,

Before you do anything else, apply for a deferment with your student loan. Since you do not have any cash flowing in, you will probably qualify. If you do, you won't have to make payments for a fixed number of months, and any portion of the loans that are subsidized will not have interest charges applied. In the event that you are not eligible, you almost certainly will be able to get a forbearance, which also gives you a break on payments, though finance charges will be added to the entire balance. Your credit report will be safe from harm, too, as you will remain in good standing with the lender.Ask Erica

Your credit card is another story. If you do not meet your payments on time, the issuer will report you as late to the three major credit reporting agencies, Experian, Equifax and TransUnion. This will negatively affect your credit scores, as payment history is the most important factor in your FICO score, the score most lenders track to assess your creditworthiness. Payment history makes up 35 percent of your FICO score. A single late payment of 30 days won't make a huge difference, but let it go for 60 or even 90 days, and the score will drop dramatically.

Another problem is your debt-to-credit-limit ratio, called utilization, which makes up 30 percent of your FICO score. If the card you mention is your only card, your ratio is at 100 percent, because all of your credit limit has been used. It's best to owe no more than 30 percent of what you may borrow. (The rest of the FICO score includes credit history at 15 percent, and new credit and types of credit at 10 percent each.)

If you absolutely can't send the minimum payment while you are job hunting, explain your situation to your credit card company. Just as you would want a friend who borrowed money from you to let you know when he's in a bind, so do banks. It's even possible that they will give you a reprieve on harsh collection action. They may still report you as late, but may agree to delay collection activity or even a lawsuit.

As for your roommates, I urge you to not stick them with the bill. It may not be ideal to go back and live with Mom and Dad, but sometimes you have to do what's right, despite it being uncomfortable.

If you don't get a job soon that allows you to get back on track, ask your parents for financial assistance. Who knows, maybe they don't want you to move back in either, and will lend or gift the money for rent.

If the only recourse is to reoccupy your old bedroom at your parents' house (or sofa surf at other people's homes), inform your roommates immediately, so they can find a replacement. It's one thing to have a marred credit report — you can fix that with future positive actions — but mending friendships isn't always so easy.

Everything should change for the better when you get a job. Focus. Make it your full time occupation to secure one. Then, when you do start to work again, take advantage of the deferment or forbearance as long as possible, send your credit card payments again (thankfully, $1,000 isn't that much to owe) and save aggressively. A car may be your next big purchase, so if you have to finance it, you'll be grateful for whatever positive credit rating you can salvage now.

Got a question for Erica? Send her an email.