When you lose a job, reality can hit pretty quickly. Here's how to ride out the storm after your well-planned financial arrangements fall into jeopardy.
Emergency fund written on a piggy bank.(Getty Images/iStockphoto/designer491)
Emergency fund written on a piggy bank.(Getty Images/iStockphoto/designer491)
When you lose a job, reality can hit pretty quickly. Suddenly, your well-planned financial arrangements may be in jeopardy.
It is possible to manage credit card payments and prevent damage to your credit score after you lose a job. But it will take some organization, self-sacrifice and possibly a few calls to companies and agencies that can help you ride out the storm.
Why you need to act fast after losing a job
In the short term after a layoff, many people can rely on a severance payment of a few weeks, several months or more. About 97 percent of companies who responded to a 2018 survey by outplacement and human resources consulting firm Lee Hecht Harrison said they offered some sort of severance benefit to employees who lost their jobs.
Severance payments can act as a financial bridge from one job to another if your unemployment period is short. Use that money wisely in the weeks — and possibly months — after you lose your job, because you’ll likely need it to pay your credit card statements and loan installments.
“Be prepared — to find a job as good as the one you had is harder than you think,” says Mike Sullivan, a personal finance consultant with Take Charge America, a nonprofit credit counseling and debt management agency based in Phoenix.
(Getty Images/iStockphoto/Tero Vesalainen)
Getty Images/iStockphoto/Tero Vesalainen
Sorting out debts and expenses
When you lose your primary source of income, it can be frustrating to face the reality of cutting out enjoyable parts of your lifestyle. But there’s no better time to do an inventory of your expenses, says Robert Dunn, vice president of counseling at Consumer Credit Counseling Service of Buffalo.
“If something drastic happens in your financial life, as far as income and expenses, it’s necessary to review your budget” and free up money by taking steps such as cutting cable and not going out to eat as much, Dunn says.
Try to make the changes quickly so you can free up the income you’re spending on things you don’t need, Sullivan says.
The day you find yourself unemployed, “you’ve got to sit down and make a list of every expense you can cut and cut them,” Sullivan says. “You can’t be in denial when you lose your job. I’ve seen folks out of work four to five months and still have not made any significant cuts in expenses.”
Once you sort out your budget, it will prepare you for the next step: prioritizing your loan and credit card payments.
(Getty Images/iStockphoto/Jirapong Manustrong)
Getty Images/iStockphoto/Jirapong Manustrong
How to prioritize payments
If you’ve cut unnecessary expenses out of your budget, the best-case scenario is that you’d at least have enough money to make the minimum payments on your loans and credit cards. Even though this could mean carrying credit card debt month to month with interest, it’s better than missing payments altogether.
If you find you can’t make all your debt payments, you probably ought to prioritize your secured debt payments over unsecured ones. Secured debts, such as auto loans and mortgages, are different than unsecured debt, such as credit cards, because a lender could seize your collateral property if you don’t make timely payments.
“You always have to view secured debt as the No. 1 priority because if you don’t make a mortgage payment, foreclosure proceedings can begin within months,” Dunn says. “It’s more damaging to your credit report and credit score when you miss mortgage payments.”
Also, if you’re a couple months behind on your auto payments, “the vehicle can be repossessed,” Dunn says. “To get a vehicle out of repossession can cost hundreds or thousands of dollars.”
That doesn’t mean it’s a good idea to skip a credit card payment, either. If you have even one missed credit card payment — which, technically, would be 30 days late in a billing cycle — it could drop your credit score as much as 50 to 80 points and stay on your credit report for seven years, Dunn says.
(Getty Images/iStockphoto/Jirapong Manustrong)
Getty Images/iStockphoto/Jirapong Manustrong
Understand hardship plan drawbacks
When you contact a creditor asking for better terms on your credit card debt, be aware that a hardship plan from the company could have long-term negative ramifications on the credit you can use, your credit report and, ultimately, your credit score.
Hardship plans usually last about a year and can include provisions that allow interest waivers, lower monthly payments or even deferred payments. While that sounds like a good deal, it comes with some short-term and long-term consequences.
“If you call the credit card company and say you’re having trouble making the payments, they are likely to take steps then to restrict your credit,” Sullivan says.
While the company wants you to repay the debt and will make it easier for you to do so, cutting your credit limit will ensure it has less of a chance of future losses. That can increase your credit utilization ratio, which is your revolving credit balance compared with your credit limit. If your credit utilization ratio is higher than about 30 percent, your credit score may take a hit.
But, “if you can’t make payments, you don’t have a lot of choice than to ask for relief,” Sullivan says.
A hardship plan could affect your credit report because the report could show that your debt is “no longer being paid as agreed upon,” Sullivan says. If you apply for new credit, lenders may be less likely to approve your application. That can be a problem if you’re trying to consolidate debt with products such as a balance transfer credit card or personal loan.
“It has a real impact on your credit and the amount of credit you can have,” Sullivan says.
(Getty Images/iStockphoto/designer491)
Getty Images/iStockphoto/designer491
How to be your own financial advocate
If you’re in a situation in which you can’t even make your minimum payment, or you know you’re about to have financial trouble soon because of a job loss, reach out to lenders and see if you can negotiate more favorable terms.
Consumers “need to view themselves as their own advocate, contact their creditors and really state their hardship, their intentions to not fall too far behind, not damage their credit,” Dunn says. Then, consumers can see what kind of program a creditor might offer, such as a lower interest rate, temporary reduction in monthly payment or delay of payments for a month or two.
“It never hurts to contact creditors,” Dunn says. “Nothing is guaranteed.”
It’s also a good idea to get help from a National Foundation for Credit Counseling-certified credit counselor who can work with you to put together a budget, prioritize debts and expenses, and possibly negotiate with creditors.
During a financial counseling session, “we sit down with a client and do a thorough review of their budget, income and expenses on a monthly basis, and review their credit report,” Dunn says.
If necessary, a counselor will create a debt management plan, or DMP, which is a comprehensive way to address all debts and might require the agency to get an agreement from multiple creditors to sort out your debt obligations for the long term.
A DMP can also ensure the payments you make keep the accounts current and don’t negatively affect your credit rating.
Regardless of the route you choose, it’s best to address it head-on, Dunn says. “It’s only going to make it worse if you don’t answer the phone, don’t tell creditors you lost your job, you have a hardship. They’re not going to know.”
(Getty Images/iStockphoto/Jirapong Manustrong)
Getty Images/iStockphoto/Jirapong Manustrong
Other Options for Debt After a Job Loss
There are a few other options for paying down or eliminating your high-interest credit card debt, including using a home equity line of credit, exploring zero percent interest balance transfer credit cards and even getting funds from your 401 or IRA.
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Home equity line of credit. With typically lower interest rates than personal loans or credit cards, a home equity line is probably the best option for paying down your credit cards, as long as you can manage payments and avoid default.
(Getty Images/iStockphoto/belchonock)
Getty Images/iStockphoto/belchonock
Balance transfer credit cards. If your credit scores are strong, you might qualify for balance transfer credit card offers that can buy you time to pay down balances without interest. Make sure to watch out for balance transfer fees and that you have a plan to pay off the debt once the introductory period ends and the regular interest rate kicks in.
“It could be just a Band-Aid on the wound as far as temporarily delaying the inevitable, and you may not be able to make more than a minimum payment on the debt,” Dunn says. “But if you need to get by for three to six months, it’s not a terrible way to stay current.”
(Getty Images/iStockphoto/SARINYAPINNGAM)
Getty Images/iStockphoto/SARINYAPINNGAM
Retirement funds. This option carries the most risk because of the prohibitive penalties you pay when you take money out of an IRA or 401(k) before you reach the withdrawal age. It’s a very expensive way to borrow money, and you could lose your retirement income, Sullivan says. “It’s not something people should do lightly — think long and hard before taking from your retirement fund.”
It seems like a contradiction, but your job loss can be a long-term financial blessing if you cut expenses and consolidate debt while in between jobs and keep your good financial habits into your next job. Losing a job can be a wake-up call to streamline your debt and overall budget.
(Getty Images/iStockphoto/AndreyPopov)
