Just about everyone experiences a bit of financial turbulence at some point and how well you weather the storm depends on what steps you take to manage your money until it passes. Having a healthy emergency fund in place can make the ride a little less bumpy but if you’re still paying off debt, you may not have had a chance to fatten yours up yet.
If your cash flow has dwindled because of a job loss, sudden illness or another unforeseen catastrophe, keeping up with your debt payments may pose a serious challenge to your budget. Neglecting your debts, even if it’s only temporary, can be devastating to your credit but you can potentially avoid any lasting harm if you’ve got a strategy for juggling your obligations.
When You Can’t Make Your Credit Card Payment
Using credit cards to cover your every day expenses or rack up rewards is a bit like walking a tightrope and all it takes is the slightest breeze to throw you off balance. If you’re feeling a cash crunch because you got laid off or your hours have been trimmed back and you’re bringing home a smaller paycheck, paying off what you’ve charged suddenly becomes a lot more challenging.
When your wallet is stretched too thin, skipping out on paying the bill may seem like your only option but it can be a costly one if your credit score suffers. If you’re in danger of missing a payment or you’ve already fallen behind, here’s what you need to do to get back on the right course:
1. Figure out What You CAN Afford to Pay
Credit card companies typically require you to make a minimum payment of 2 to 3 percent of the balance each month. If you only owe a few hundred dollars, that’s not likely to put too much strain on your wallet but it’s a very different story if your credit card debt totals in the thousands. On a $10,000 balance, you’d be looking at a payment of $200 to $300.
Calculating how much money you can reasonably pay is the first step to dealing with the debt when your finances are feeling the pinch. Start by adding up all the costs that are necessary to meeting your basic needs. That includes housing, utilities, groceries and insurance. Be ruthless in cutting out things you can do without, such as cable TV or your gym membership.
Next, factor in your other debt payments that take precedence over the credit cards. If you’ve got a car loan, for instance, and you need the car to go on job interviews that would need to be paid first. Once you have an idea of what your budget looks like, compare that to the income you have coming in. Any money that’s left over that isn’t allocated towards a specific expense is what you can put towards your credit card debt.
2. Call Your Credit Card Company
Keeping a low profile with your credit card company when your finances are on the skids will only hurt you more in the long run. If you don’t make any effort to pay the bill, the missed payments will show up on your credit report and take a big bite out of your credit score in the process. Things can only get worse if the debt gets sent to collections since you could be sued, have your wages garnished or have your bank account seized.
Credit card companies lose if you end up defaulting so many of them offer hardship programs to struggling customers. The details of these programs vary from one card issuer to another but generally, you may be able to get your minimum payment reduced, lower your interest rate and suspend finance charges temporarily. You’ll have to be able to prove a financial hardship to qualify and you should know beforehand what kind of payment you can afford.
While a hardship program can keep you from defaulting on your credit card, there are some downsides to keep in mind. First, the credit card company may require you to close your account in order to enroll. If it’s an older account or your balance owed is close to your overall credit limit, shutting it down can knock points off your credit score.
One of the most important things to bear in mind is that you’ll need to follow the terms of the agreement to a “T”, otherwise, the credit card company could kick you out of the program. If that happens, you’d have to resume making the regular minimum payment at a higher interest rate. That could put you at greater risk of default if your financial situation hasn’t improved.
3. Consolidate Your Balances to Save on Interest
If a hardship program isn’t available, making your credit card debt more affordable is another way to get relief when money is in short supply. Transferring your balances to a card with a 0 percent rate can give you some temporary breathing room until your financial situation changes. Just know that you’ll need to be up to date on your payments to qualify for the best deal.
When shopping around for a promotional offer, make note of how long you have to enjoy a 0 interest deal and how much the fee comes to. Ideally, you’d want to stretch out the interest-free period as long as possible and pay the lowest fee. The transfer fee is typically around 3 percent of the balance, although there are certain cards that will waive it for new customers.
If You’ve Already Missed a Payment
Missing even one credit card payment can take a toll on your credit score so if you’re already a month late, you can’t afford to wait another second to take action. First, you need to bring your account current by paying the minimum amount due. If you can’t pay the minimum all at once, ask your card issuer if they’ll allow you to break it up into multiple payments.
Next, you should write a goodwill letter to your card issuer explaining why your payment was late and asking them to remove the negative mark from your credit. If you’ve always been a good customer in the past and you’re only a month or two behind, you’ve got a shot at reversing the damage to your credit. Take responsibility, explain the situation clearly and above all, be polite. At the very least, the card issuer may be willing to credit your account for any late payments or finance charges
Sticking your head in the sand when you can’t pay your credit card bills is a guaranteed way to throw your finances into even more turmoil. Facing up to the problem and tackling it head on isn’t always the most comfortable option but it’s the right move if you want to safeguard your credit.