Key takeaways
- Continuing to make minimum payments on debts is important to keep accounts in good standing.
- Avoid using credit cards when you’re unemployed and accumulating debt you can’t afford to repay.
- Contact with lenders to work out payment plans for your debts to avoid foreclosure or repossession.
- Debt settlement may be able to help resolve your situation, but it’s important to find a reputable debt settlement company.
Although unemployment figures have fallen since the coronavirus pandemic has subsided, many people are continuing to experience job loss and reduced work hours. According to the Bureau of Labor Statistics, the unemployment rate stands at 3.8 percent as of September 2023.
If you’re among this group of individuals that have been laid off, it can be challenging to plan for the future and know which financial goals to prioritize in the short term. Owing creditors makes managing your financial health and protecting your credit score even more difficult, but you have options.
If you’re currently unemployed and carrying credit card debt or other forms of debt, here’s what you need to know.
What should you do if you lose your job and cannot pay debts?
If you’re having trouble paying your bills after losing your job, you’re not alone. Credit card debt in particular can feel overwhelming even when you are employed, and many people struggle to make ends meet after being laid off or furloughed.
Here are some ways to begin managing your debt during a period of unemployment:
Make the minimum payment
If you can afford your credit card’s minimum monthly payment, keep making that payment for as long as possible. Minimum payments keep your account in good standing with your lender and the three credit bureaus, and you won’t get charged late fees or penalty APRs for missing payments.
Contact your creditors
If you can’t make the minimum payment on your cards, contact the credit card issuer. You might be able to negotiate an agreement that temporarily reduces your minimum monthly payment, waives your interest, lowers your interest rate, allows you to postpone monthly payments or lets you pay off a portion of your debt in a lump sum. But don’t wait until you fall behind on payments. Be proactive and call your creditors as soon as you realize you can’t afford the minimum payment.
Consider debt consolidation
If you can consolidate your debts into a single monthly bill, you might find it easier to keep up with the payments. Balance transfer credit cards are designed to help you consolidate multiple credit card balances onto a single card, generally with an introductory zero percent APR period. This gives you the opportunity to make payments on your debt without worrying about interest charges. Use Bankrate’s balance transfer calculator to learn more, including how long it might take to pay off your debt in full.
Sign up for credit counseling
A reputable credit counselor can help you make a budget, create a plan for paying off your debt and direct you towards appropriate debt relief options.
These tactics can also help you get relief from other forms of debt, like personal loans, auto loans and home equity loans.
What happens if you stop paying credit card bills and loans?
If you can’t pay your bills, what happens depends on the kind of debt.
Credit cards
If you find yourself unable to pay your credit card bills, try to make at least the minimum payment on time every month. By forgoing timely minimum payments, you’ll risk late fees and may be subject to a penalty APR, in which the credit card company raises the interest rate on your unpaid balance. Once a penalty APR is issued, it’s likely to last a minimum of six months even if you make your subsequent payments on time.
If you miss one payment, however, don’t assume the worst. Contact your credit card issuer, explain that you missed a payment, and ask if they can waive the late fee. Some credit card issuers automatically waive the late fee on the first missed payment, understanding that everyone makes mistakes now and then.
Try to make up the payment within 30 days of the due date. Otherwise, you risk taking a credit score hit if the late payment is reported to the credit bureaus, calls from debt collectors — and if you continue to miss payments, your credit card issuer might even close your credit card account. Plus, the late payment will linger on your credit report for up to seven years.
If your credit card issuer enrolls you in a hardship program, negative credit reporting may be suppressed if you meet the terms of the agreement. Furthermore, the lender will continue to report your account to the three credit bureaus as current. If you can’t pay your credit card bills after you lose your job, working on a plan with your issuer can protect your credit score.
Personal loans
Most personal loans are unsecured, meaning that you don’t have collateral to get the loan. While this means the lender doesn’t have anything they can take from you, that doesn’t mean you are immune from any consequences.
Typically, debt delinquency follows this timeline:
- 30 days: Late fees and a reminder from your lender. Your credit score may drop.
- 60 days: More communication from your lender, likely more fees and likely continued credit drops.
- 90 days: The impact on your credit at this point will be significant and take a long time to get rid of.
- 120-180: Your lender may charge off your debt, which will have a severe impact on your credit score for years. In some cases, the lender may sue you or get paid by garnishing your wages.
If your loan is secured by collateral, such as with your car, the lender may repossess the collateral if you do not cover your payments.
Home equity loans and HELOCs
Because your home is the collateral for your loan, a lender may repossess the house if you do not pay off the debt. Therefore, get in contact with your lender early and work out a payment plan or other options.
Using credit cards and loans while unemployed
Generally, you should not make a purchase on credit or get a loan that you can’t afford to pay off. This means that if you are unemployed, you shouldn’t use your credit cards to cover the expenses you can no longer pay for in cash; instead, you should focus on budgeting and generating new sources of income.
However, many people do use their credit cards or a personal loan as a financial lifeline when they are unemployed, especially if they don’t have an emergency fund — and with long-term uncertainty looming, you may need to turn to credit when bank balances run low.
If you decide to use credit to cover the income gap during unemployment, remember that whatever you purchase now must be paid off later, with interest. Try to keep your balances to a minimum.
Can you qualify for a new credit card or personal loan while unemployed?
If you want to get a new credit card when you are unemployed, you have a couple of options.
The Credit Card Act of 2009 allows credit card applicants to include any sources of income to which they have “reasonable expectation of access,” including a spouse’s income or unemployment benefits. If your household brings in enough income, you might be eligible to qualify for a new credit card even while unemployed.
You might also consider a secured credit card. These cards allow you to secure a line of credit by putting down a deposit which generally acts as your credit limit. Secured credit cards may not give you much purchasing power, but they can help you build a solid credit history while unemployed.
If you want a personal loan, you will need to find a lender that will work with you. Some lenders offer bad credit loans or have low income requirements. Many personal loan lenders do not allow cosigners, so you will need to be able to qualify on your own.
Will filing for unemployment affect your credit score?
Filing for unemployment benefits will not affect your credit score. Your FICO Score is based on five major factors: payment history, credit utilization, length of credit history, credit mix and age of credit. Your employment status is not taken into account (though income may affect your credit limit or your ability to qualify for a new card) — as long as you’re able to maintain a positive payment history and avoid running up high balances on your credit cards, your credit score should remain stable.
Should you withdraw money from your 401(k) to pay off your debts?
If you are tempted to pay off your debt by dipping into your retirement fund, remember that taking early withdrawals from your 401(k) comes with serious consequences. You’ll pay taxes on the money you withdraw, plus an early withdrawal penalty. These penalties might apply even if you take a qualified hardship withdrawal.
You should also think carefully before withdrawing from your 401(k) during a volatile market. When the stock market is down, your investments hold less total value than they may when the market rebounds. If you can leave your 401(k) alone during an economic downturn—like the panic resulting from the coronavirus pandemic — you won’t have to withdraw your money at a loss.
Plus, pulling money out of your 401(k) early means losing out on all the compound growth you could have earned over time and shortchanging your retirement fund. Some 401(k) programs allow you to borrow money from your 401(k) and pay it back over time, which is often a better solution than taking an early withdrawal.
Alternatively, you can withdraw your Roth IRA contributions (not earnings) at any time without penalty, although you’ll still miss out on the compound growth you could have earned if you left your money in the Roth.
Should you take out a personal loan or home equity loan to cover your debts?
Some consumers use personal loans, home equity loans or home equity lines of credit to pay off outstanding credit card debt. This isn’t free money, of course; any loan you take on will have to be repaid with interest. And with home equity loan products, you’ll be repaying the amount of equity you borrow and mortgage payments simultaneously.
The big difference between a personal loan and home equity loan versus home equity line of credit is that the loan arrives as a lump sum and the line of credit allows you to take on as much or as little debt as you choose, up to your credit limit.
Since home equity loans and home equity lines of credit generally offer lower interest rates than personal loans and credit cards, borrowing against your home to pay off your credit card debt could save you money in the long run. However, doing so won’t completely solve your debt problem. If you don’t make timely payments on your home equity loan or line of credit, you could risk foreclosure — and if property values dip, end up owing more money on your home than it’s worth. But you won’t take on the same level of risk with a personal loan if it’s unsecured.
Should you consider a debt settlement program?
Debt settlement programs can help you manage your debt by negotiating a payment plan with your credit card companies. However, there are a lot of shady debt settlement companies out there, so do your research before you commit.
Remember that you can always call your credit card issuers on your own to request a lower monthly payment, a reduced interest rate or a payment plan that allows you to pay your debt over a longer period of time.
Bottom line
Do your best to make the minimum payment on your debts each month, even when facing financial hardship, to avoid late fees, penalty APRs and credit score issues. Contact your credit card company to see if you’re eligible for hardship programs to reduce your monthly payments or interest rate.
While you might consider a personal loan or home equity loan product to help pay off outstanding debt, it’s better to solve your credit card problem by carefully budgeting and looking for new income sources when possible.
If you are considering using your credit cards or a loan to cover the income gap during a period of unemployment, remember that any purchases you make now must be paid off later, so don’t take on more debt than you can handle.
Lastly, remember that you are not alone. Despite drops in unemployment figures, many Americans are facing similar financial situations and it will take time for the economy to make a full financial recovery. Until then, take advantage of any unemployment benefits or other government programs that may be available to you, work with your creditors to manage your current balances.
