Twenty-six million people are freshly unemployed, but creditors still want their money. For anyone struggling to pay their bills and triage all their expenses, where does credit card debt rank? Should people even be using a credit card? What if you can’t make payments on it? In our post-coronavirus world, how do we negotiate credit card debt nowadays? Alongside Philip Olson, a certified financial planner and co-host of PBS’s Two Cents, we’re paying off those questions with some answers.
I’ve got all kinds of debt. What do I do about it?
First off, what’s your own situation? Are you still employed? (Lucky you if so.) Were you laid off? If things are more or less as they were for you pre-coronavirus, you should continue to make payments like you were before. Creditors are talking about offering all sorts of relief (more on that in a bit), but there’s little to take advantage of if you don’t really need the assistance — the money is obviously still gonna be due at some point. “The offers are designed for folks who are truly struggling,” Olson says.
What if I lose my job?
This is when you need to triage all your expenses. At the top, think of the things you literally can’t live without: food and water. So your grocery bills and water bill and other true essentials should be there. Next are essentials like shelter and transportation — your rent/mortgage and car payments or other auto expenses. Minimum debt service is the third rung on that ladder, then below that is additional debt pay-down.
“Paying debt at all is something you should only do if you’re able to afford basic living costs first,” Olson says. “So I’d say it’s okay to stop or even pause paying your debt if you can’t.”
Should I not even use my credit card at a time like this?
First of all, it’s always best to use your credit card if you have the funds to pay it off in full every month. That should be Plan A. “If you’re in a situation where you can’t do that, [using] a credit card is a pretty dangerous fallback,” Olson says. “If you can do anything else other than adding balance to your credit card that you cannot pay off, that should be the first thing you do,” whether it’s getting help from friends and family, finding something you can sell or arranging favorable loan terms on a personal loan (which, FWIW, often require a good credit score). The great way to make a bad financial situation a lot worse is to incur credit card debt that will stick around long after this virus goes away.
“It makes me really nervous, the idea of going deeper into credit card debt as a backup plan,” Olson says. “To me that’s like Plan E or F. Sadly, a lot of folks have actually reached out to me thinking of it as plan A.”
What about those zero percent credit card transfers?
That’s actually what Olson’s talking about. The idea is that you can transfer your credit card balance to another line of credit that has zero percent interest for a given amount of time — maybe a year, or even 18 months (and there’s no fee). Maybe you can buy yourself a little bit of time, you might say to yourself. But it’s best to think of it as kicking the can down the road — which, of course, isn’t an actual solution, just a delay.
The catch with these balance transfers, though, is you generally have to have good credit. Also, the terms aren’t always set in stone — they’re negotiable, and the creditor could change them and leave you totally screwed.
Olson says it’s a dangerous game to play. What if you lose your job? That bill will still be due once the term ends… and then, holy shit, the interest accrual will begin. “Credit card interest rates are absolutely ruthless once the juice turns back on, and it can be very, very difficult, if not impossible, to get out of that,” Olson says.
Olson says there’s very strong clinical research that shows that spending money on debt, including credit cards, doesn’t feel as costly or as painful as spending out of a bank account or spending cash. The result of that is you end up spending more. Likewise, moving debt from a scary, high-interest place to a low-interest place alleviates the pressure and your urgency to put out the fire. “This can result in you kind of being casual about it, maybe not being so careful with your spending, and the fire can burn out of control while you really weren’t paying attention to it,” Olson says.
Cash advances: Bad idea, right?
Unless the thought of paying it back at 20 percent interest or higher sounds like fun, don’t you dare get a cash advance from your credit card. That should be one of your last options, Olson says.
Are there any circumstances where I just shouldn’t make credit card payments?
Not really. But here’s what you should do — like, right now — if you think you can’t pay off your balance in full for your next payment, and especially if you can’t pay anything toward it (though the minimum payment is usually pretty low: say, $25): Call the goddamn phone number on the back of your card.
Credit card companies have equipped all of their customer service teams to be empowered to make concessions right now. It’s on a case-by-case basis (though Olson thinks it’ll become more standardized at some point), but at the moment, they’re offering things like waiving interest, delaying payments and potentially letting a default or nonpayment on your card not affect your score. Or possibly all of those things, Olson says. If you’re having trouble making payments, there’s literally no reason not to call.
“Not paying your credit card in full shouldn’t even be considered until you’ve had these conversations because they’re becoming more generous,” Olson says. “There’s a lot of industry pressure to be more lenient in these times, so why miss a payment and rack up interest when all it takes is a two-minute phone call to have that not happen?”
So basically, the rules are a bit different (if you’re hard up, creditors are able to give you a little break) but also kinda the same: If you can’t pay it off at the end of the month, try not to swipe or insert your card, or be faced with a rapidly accelerating balance from insane interest rates. Because even more so than the Wu-Tang Clan, credit card debt ain’t nothin’ to fuck with.