Editorial Policy

Concerned about Losing Your Job? Get Your Credit Card Situation in Order

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

With unemployment rates soaring, if you haven’t already lost your job, you may well wonder when you’ll end up as the next pink slip statistic. Losing your job can be devastating, but the steps you take, both before and after you lose your job, can make a big difference in whether a job loss will be a short-term blip or have a long-term impact on your financial health.

An estimated two-thirds of Americans carry credit card debt over from month to month. While this may be all right while everything is business as usual, credit card debt leaves you particularly vulnerable should you become unemployed.

The first place most people turn to make ends meet when they lose their jobs is their credit cards. However, this is a dangerous way to deal with a financial emergency. If your unemployment drags on, you’ll be faced with rising credit card debt, and with less money to pay off your debt.

No wonder that late payments and defaults on credit cards tend to go hand in hand with unemployment rates. As unemployment has soared to record highs, so have credit card delinquencies. According to Fitch Ratings, credit card defaults may rise above a record 10 percent in 2009, as consumers struggle with the mounting pressures of unemployment, falling housing prices, and a stock market in a tail spin.

However, defaulting on your credit card payments is the last thing you want to do when you become unemployed. Late payments will trap you in a vicious cycle. Firstly, late payments will cause card issuers to hike the interest rate you pay on your credit cards. This will make it harder to pay off your debt, and it’ll cause the minimum payments to increase. That in turns makes it harder to meet the monthly credit card payments, causing more late payments, and on and on.

In short, credit card debt during unemployment can easily become a financial house of cards, turning a temporary setback into a life-changing financial disaster. If you don’t get your credit card house in order, even a short-term period of unemployment can permanently damage your finances, and even impact your ability to get another job.

Many employers review your credit report when you apply for a new job. If your report shows credit card defaults or charge-offs, or even just repeated late payments, you’re putting yourself at a serious disadvantage. A prospective employer is likely to conclude that you may not be a reliable or trustworthy employee and move on to the next candidate.

Here are three steps to take to prepare in advance for unemployment and to make sure that a short-term financial hardship doesn’t turn into a financial disaster that will take years to recover from.

  1. Consolidate your credit card debt. If you can’t pay off your entire credit card debt in full, at the very least take steps to consolidate your credit card debt onto low interest credit cards. The best way is to apply for a low interest balance transfer using your existing cards. See our article series on how to get the best low interest balance transfer deals on the credit cards you already have.
  2. Pay down your credit card debt. Once you’ve consolidated your credit card debt with low interest balance transfers, the lower interest will reduce the minimum monthly payments on your cards. Use this extra money, and any additional money you can free up, to pay down your credit card faster.
  3. Build up an emergency fund. Having a 6-month emergency fund is one of the best preventative strategies should you suddenly become unemployed. An emergency fund will give you a source of cash to allow you to continue to pay your bills and make ends meet while on unemployment benefits.

How do you build up an emergency fund while also paying down your credit card debt? Once you start looking to save, you’ll be surprised at how many ways you can cut back on expenses. Most people habitually throw money at things that they can easily do without.