Help for Unemployed with Credit Card Debt

Unemployed and in Credit Card Debt

The psychological wounds from losing a job eventually heal, but depending on how you handle your finances, the monetary ones can reverberate long after the pink slip turns to dust. So it’s critical, as soon as you get past the shock, to take stock on your cash flow and create a plan.

First, know you’re not alone. The U.S. economy, which once offered many workers what seemed like lifetime work with a single employer, now adds and sheds jobs at a dizzying pace. Though the unemployment rate has fallen steadily over the past several years, thousands of jobs are lost every day. The good news is that it’s a great deal easier to find another one now than it was during the gloomy Great Recession of 2008.

Average Length of Unemployment in 2016

Unemployment is less devastating than it was during the Great Recession. People were between gigs for a seasonally adjusted average of 27.7 weeks in April 2016, with a median duration of 11.4 weeks, according to the U.S. Bureau of Labor Statistics. That was down from an average of 30.5 weeks, with a median of 11.6 weeks, in April 2015.

In the years following 2008, joblessness soared as high as 10.2% and new work was hard to find. At the same time, many people had greatly over extended themselves buying homes with mortgages that quickly went underwater.

The prospects for those who are out of work and want to go back continues to brighten, but the right job might take weeks or months to find. Unemployment compensation can help deal with debt, but searching for a job generally means living on less for a while.

Here are some tips for putting your finances right while you polish your resume.

What should you do if you’re newly unemployed?

First, if you qualify for jobless benefits, apply for them and then focus on finding a new gig. Polish your resume. Call your friends. Look at online postings. Get moving as soon as possible. If you can find part-time work in the interim, take it.

Next, prioritize your expenses. For most of us, food and shelter are the top priorities. If you have a mortgage or pay rent, you’ll need to figure out how to manage your finances to cover the costs. That may mean making a budget and cutting back in other areas. Eating out and going to movies are two examples of expendables.

How To Manage Credit Card Debt After You’ve Lost Your Job

Create An Emergency Budget

Hopefully, before your got the bad news from your boss, you had socked away cash in a bank account to keep you going for at least six months. Even if you did, it’s time to cut back spending. That means make rapid-fire decisions on what you need and what you don’t. Eating out? Forget about it. Americans spend almost 40 percent 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.

That settled, pull out your bills and focus on the ones you pay every month, especially phone and cable. You probably 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 the options. The same goes for cable TV. Drop the premium channels for now or consider cutting the cord all together and watch streaming videos online instead. You might discover removing TV from your life will mean more time for what matters — finding work.

Prioritize Spending

It’s a little like triage in a hospital emergency room, where the staff decides which cases need immediate treatment and which don’t. You need to pay your mortgage or rent, cover the essential utility bills and buy food. Call those Category One expenses. Then consider what you might be able to defray. Are you able to delay a car-loan payment? Can you shift to paying the minimum on your credit card? Obviously, these aren’t great long-term strategies, but they might make sense when an unemployment check is your only income.

Next-steps include:

  • Consider the options. 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.
  • Check your credit report. Employers often review job applicants’ credit scores. Order a free copy of your report and check it for accuracy.
  • Call your creditors. If you owe money, check what options might be available for reducing minimum credit card payments while you’re unemployed. Though you might be tempted to hide your employment status from creditors, they are often willing to work with you to avoid default. Many lenders maintain credit-card-hardship programs that lower monthly payments or delay payments entirely for a certain amount of time. Be aware that entering a hardship agreement probably will be entered in your credit history and likely will impact your credit score. Seeking this kind of relief should be considered a last resort, but if you can’t make minimum payments, it is worth pursuing. Remember, lenders don’t advertise hardship programs. Gather Information through online research, which you should do before you contact the lender.
  • Talk to your former employer. If you were laid off, your last employer might want to help. Some companies offer out-placement services that include job-hunting courses and generic financial advice for the unemployed.
  • Consider getting third-party help. If you have multiple creditors, try getting help from a credit counseling agency. These agencies typically specialize in working on behalf of overextended borrowers, not the unemployed, to lower interest rates and eliminate late fees. But if the loss of a job creates a major financial crisis, such help might be very valuable.

More than anything, it is important to stay calm and focused. Don’t procrastinate looking for work or training that will lead to a job. Keeping a positive attitude while bringing extreme discipline to spending will see you through this rough patch and prepare you for a bright future.

Using Your Credit Cards While Unemployed

Be very careful about using your credit cards. It’s tempting to take on credit card debt with the expectation that “I’ll catch up 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? Take the credit cards out of your wallet.

If you still don’t have enough to meet debt obligations after you pay for housing and groceries, you might have to contact your creditors.

Creditor Hardship Programs

Creditors sometimes will offer a hardship option allowing you to pay less for a while. Try negotiating with them. Call credit card companies and the administrator of your student loan, if you have one. The same can be done with your car loan. Even mortgage lenders might negotiate forbearance, allowing you to make partial payments, or even no payment, for a short time.

Even if successful, these strategies won’t forgive your debt. Your payments may extend beyond the established repayment period, but at least you’re buying some time until you find a job.

Another important step is reducing your expenses. Recurring monthly expenses often represent a large amount of your outflow. Trim them. Here are a few steps to consider:

  • Drop your cable TV service or cut back to a cheaper plan.
  • If you have a home phone line, suspend it and rely on your cellphone.
  • Reduce energy costs. If it’s summer, raise the thermostat on the AC. In winter, wear sweaters and lower the temperature.
  • Suspend other services and do the work yourself. You have extra time when you’re out of work, so mow that lawn yourself. If you have a pool, maintain it on your own. And do without the house cleaning service, if you have one.
  • Trim subscriptions. Drop the streaming TV. Suspend the newspaper if you get one.

Government Assistance Programs: Food Stamps, School Lunch Programs

Applying for government assistance, including food stamps and school lunch assistance is another option. 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.  Also, avoid using your credit cards as cash machines. While you might find such options tempting, they often come with very high interest rates and can create more problems than they solve.

Two other things to consider:

  • If you have an emergency fund, use the money sparingly. You never know how long it will take to find a new job, or whether you’ll need money to move when you land a new one. Also, you might have a health emergency during unemployment, and the fund emergency fund will help.
  • This might also be a good time to do a home inventory, selling what you don’t need. Craigslist and eBay are good ways to sell stuff, and you can also hold an old-fashioned garage sale.

Though setting up a debt management plan while you’re out of work might not be a good idea, seeing a credit counselor can be a good idea.

The counselor can review the options and make suggestions about how to handle your debt, especially installment payments. The idea is to create an emergency financial plan and follow it until you land work. With a little help and a lot of discipline, you’ll be able to avoid damaging your very valuable credit.

Bad Credit & Unemployment: A Vicious Circle

Job applicants have to painstakingly pore over their resumes and cover letters because studies show that hiring managers have little tolerance for any mistakes. And now, there’s something else for an applicant to worry about — his or her credit profile.

At the same time the lagging economy is adversely affecting people’s personal finances — and thus their credit histories — employers are scrutinizing the way people pay their bills as part of their screening process.

The U.S. Equal Employment Opportunity Commission is so concerned about this trend that it held a hearing recently to examine the potential impact on workers.

The Fair Credit Reporting Act allows employers to pull credit reports on current employees and job applicants as long as certain disclosures are made. An employer has to get written authorization from the individual to view a report, and then must give the worker or applicant a copy along with a written description of the person’s rights before taking any adverse action based on what is in the document.

The Society for Human Resource Management says job applicants shouldn’t worry too much about credit checks. Although about 60 percent of organizations use credit checks when selecting employees for some jobs, only 13 percent of organizations conduct credit checks on (BEG ITAL)all(END ITAL) job candidates.

“Credit check results are one important component of the hiring decision but are not typically the overriding factor in the consideration of a job candidate,” Christine Walters, a human resource professional and lawyer, told the EEOC.

While some employers may review credit histories thoughtfully, others may automatically screen out all applicants with a weak credit record, testified Chi Chi Wu, a staff attorney at the National Consumer Law Center.

Wu fears that potential employees, especially minority job applicants who are often the victims of predatory credit practices, will not be fairly judged based on their ability to perform a job and will be shut out of employment because of their credit history.

She’s not alone in her concern. Eighteen states and the District of Columbia have recently considered legislation to restrict the use of credit reports in hiring, according to the law center. Oregon and Illinois recently enacted laws restricting the practice.

Wu told the EEOC that it should prohibit or, at the very least, greatly restrict the use of credit reports in the employment process.

“A simple reason to oppose the use of credit history for job applications is the sheer, profound absurdity of the practice,” she said. “Using credit history creates a grotesque conundrum. Simply put, a worker who loses her job is likely to fall behind on paying her bills due to lack of income. With the increasing use of credit reports, this worker now finds herself shut out of the job market because she’s behind on her bills.”

Here’s the underlying question that so far has no definitive answer: Do workers with money troubles have a propensity to steal from their employers?

I couldn’t find any independent research that says yes, if a person has lousy credit, he or she is more likely to embezzle money or accept bribes.

“Although there is considerable research that supports the use of credit scores in making consumer decisions, there is little research exploring the implications of using credit checks in employment decisions,” said Michael Aamodt, principal consultant with the DCI Consulting Group, where he conducts salary equity analyses.

We’ve come to accept that our credit history will be pulled and checked if we want to borrow money. That’s fair enough.

We’ve begrudgingly accepted that insurers set car or home insurance premiums in part based on how customers handle their credit.

Certainly there are some jobs where it does matter how an employee or applicant handles money. Some employers are required to pull a credit report if an employee is going to handle cash or work in a financial services position. At least that makes sense. If you’ve got some major personal cash flow issues, the temptation may be too great. Nonetheless, this trend of employers digging into people’s personal finances is something we should be challenging and restricting.

I’ve worked with quite a number of unemployed individuals whose credit has taken a beating as a result of their loss of income. And now on top of worrying about finding a job, they have to pre-emptively tell a prospective employer about their financial difficulties. Even if they’ve been reckless with their own funds, it’s not something job candidates should normally have to disclose or discuss. It’s really none of the employer’s business.

Get help when you are unemployed and in debt.


Sources:

Unemployed Persons by Duration of Unemployment (2016, May 6). U.S. Bureau of Labor Statistics. Retrieved from: http://www.bls.gov/news.release/empsit.t12.htm

Dealing with Job Loss (December 2013). Federal Trade Commission. Retrieved from:https://www.consumer.ftc.gov/articles/0402-dealing-job-loss

Melia, Marilyn Kennedy. Coping with Debt When You’re Laid Off. (2009, March 3). Bankrate.com. Retrieved from:http://www.bankrate.com/finance/debt/coping-with-debt-when-you-re-laid-off-1.aspx

Karp, Gregory. How to Survive Losing Your Job, in 12 Steps (2015, Aug. 28). Chicago Tribune. Retieved from: http://www.chicagotribune.com/business/ct-laid-off-finances-0831-biz-20150828-story.html

Miranda (2013, February 20) How to Handle Debt If You Become Unemployed. Retrieved from: http://blog.readyforzero.com/deal-debt-unemployed/#.WCDRh-SQyUI

Karimi, S. (2016, June 8) How to Manage Debt While Unemployed. Retrieved from: http://money.usnews.com/money/blogs/my-money/articles/2016-06-08/how-to-manage-debt-while-unemployed

Wong, K. (2015, July 15) What to Do About Debt When You’ve Lost Your Job. Retrieved from: http://twocents.lifehacker.com/what-to-do-about-debt-when-you-ve-lost-your-job-1717617977

Sandberg, E. (ND) 5 steps to tackling debt while unemployed. Retrieved from: http://www.creditcards.com/credit-card-news/sandberg-5-steps-handling-credit-card-debt-unemployed-1377.php

(NA) (2016, November 4) The Employment Situation – October 2016. Retrieved from: http://www.bls.gov/news.release/empsit.nr0.htm