- What to do About Credit Card Debt During the COVID-19 Pandemic
- Stop Borrowing
- Focus All of Your Spending on Essentials
- Don’t Cancel Cards
- Call Your Creditors if Needed
- Pay What is Comfortable
- Be Careful Where You Find Help
- Don’t Trade Good Debt for Bad Debt
- Set Priorities with Your Bill Payments
- Coronavirus and dealing with debt: Tips to help ease the impact | Consumer Financial Protection Bureau
- Contact your lenders if you are at risk of missing payments
- Wondering how to respond to a debt collector?
- Consider working with a credit counselor
- Be wary of scams
- Consider legal representation or bankruptcy
What to do About Credit Card Debt During the COVID-19 Pandemic
While the economy is struggling to recover from the COVID-19 pandemic, many people are dealing with debts they incurred prior to the crisis.
Specifically, credit card debt creates a special challenge for consumers. It is debt that will grow over time if it isn’t paid off, and could keep mounting if people use credit for purchases. The pandemic creates a need to think about credit card debt differently. Here are some tips to manage your credit card debt during the pandemic:
The very first priority for credit card debts during the pandemic is to stop using them. Don’t add to your debt during this crisis, no matter what else is going on. One of our top rules is never use credit as a substitute for income, and that’s what you’d be doing if you use credit cards for regular expenses while in lockdown.
We understand these are difficult and unprecedented times. Job loss or reduced income can make it seem impossible to survive financially. That said, if you use credit cards to bridge the gap, you’re setting up a massive financial crisis. The longer the borrowing goes on, the worse the crisis will be.
More Resources: Unemployment Tips During the Pandemic
The better response is to face the crisis now, while it’s more manageable. Use every resource available to you to avoid borrowing any more money through credit card use.
Look for sources of relief that have been offered in response to the crisis and do so as soon as possible—if you use credit cards to limp along and get through the pandemic, there may not be as many relief options for you later.
Don’t set yourself up for a second financial crisis after we’ve all gotten through this one together.
Focus All of Your Spending on Essentials
Because it’s crucial to stop accumulating new debt during a crisis, you should focus your budget on essential spending.
There are a lot of discretionary expenses that we were all forced to cut back on during the shutdowns in response to the pandemic.
We stopped going to the movies, dining out at restaurants, going to theme parks, concerts, etc.
Even as the economy slowly warms back up, make sure you have all of your essential spending covered without using credit cards before considering any non-essential spending.
Even within an essential spending category, groceries, there is room to separate essential spending from non-essential. Skip the takeout coffee while out shopping for groceries. Choose a generic brand whenever you can.
This is a good time to test yourself and see just how frugal you can be. This will help you get through the financial parts of the COVID-19 pandemic, and pay down debts that could become a bigger problem for you later.
Related Article: The Best Way to Use Your Coronavirus Stimulus Check
Don’t Cancel Cards
Even though it’s best to live without depending on credit cards, that doesn’t mean you should close those accounts. If you can keep them open, it will be better for your credit score as you pay down the outstanding balances. You should consider cashing in any rewards you’ve earned, and use those rewards for essential spending.
Related Article: What to do if you have too many credit cards
You could try to cancel any purchases that haven’t gone through yet, large online orders that haven’t shipped. You can do that without closing your credit card account and impacting your credit score.
Due to safety concerns some retailers are temporarily halting returns due to COVID-19, so make your purchases carefully. If you think there is a chance you may have to return your purchase, ask the store for their return policy so you don’t tie up your money with the inability to make a return.
If your situation warrants it, a program a debt management plan might require you to close open accounts; that’s a different matter, and it’s important to do everything the plan requires of you.
You might also consider closing an account with a large annual fee, but it’s best to have the account fully paid off before closing it.
For most general credit card accounts though, it’s better to keep them open, paid off, and unused.
Call Your Creditors if Needed
If you’re facing struggles with making all of your payments, don’t hesitate to reach out to your creditors—especially during the coronavirus pandemic. Most major banks and creditors have programs to offer relief to consumers who are having trouble making their payments. They might allow you to skip payments, lower your interest rates, or grant some other kind of forbearance.
More Resources: Do you qualify for COVID-19 financial relief? Take This Quiz!
A lot of people will do what they think is right, and scrape together a budget to get by without asking for help. That can be honorable, but you shouldn’t do it if it puts you in greater financial danger.
You might stretch yourself too thin getting through the crisis, then face a financial fallout months later. You might not have as much luck getting relief from your creditors many months after the crisis has subsided.
If you have any trouble with your finances, speak up now and ask for help while it’s being offered.
Pay What is Comfortable
Our standard advice is to always pay more than the minimum monthly payments to all of your credit cards. Paying only the minimum required means staying in debt for years—even decades—and running up more in interest charges.
A global pandemic is one case where one can deviate from our standard advice; of course, try to pay more than the minimum required payment if you can, but if you can’t, that’s okay, as long as you make your payments on time. If it helps you meet your budget and get through the situation without growing your debt, making only the minimum payment could be the sensible thing to do.
Be Careful Where You Find Help
Beware of scams. There are a lot of bad actors who take advantage of people in tough situations. Even during a global crisis, you have to be careful and protect yourself from those who would take advantage of you.
Our COVID-19 guide contains the warning don’t fall for scams, and contains some advice. In short, be suspicious of anyone who contacts you about financial aid, debts, or any financial responses to the pandemic.
Make sure you initiate and control these interactions, and that you’re talking to someone trustworthy.
Our best advice is to stick with reputable nonprofit organizations (here’s a hint: look for approval by the COA (Council on Accreditation) and/or HUD (U.S. Department of Housing and Urban Development. It’s difficult to get approved by those agencies, and having approval from one or both of them is one signal that the agency you’re working with is legitimate.)
Don’t Trade Good Debt for Bad Debt
During hard times, many people make a bad trade; they use good debts to pay off bad ones.
What we mean by that, essentially, is don’t refinance your mortgage or use student loans to pay off credit cards.
A mortgage is “good debt” because it helps you build a long-term asset that you can live in and ideally own by the time you retire.
If you refinance or take out a second mortgage to pay off credit cards, you’re trading good debt for bad. Don’t let credit card lenders force you to give up your equity in your home!
We urge you to look for other ways to pay down those “bad” debts, while keeping your progress toward paying off your mortgage. wise, use student loans sparingly and only for their intended purpose—don’t use student loans to pay off revolving debts or buy assets.
Learn More: Good Debt Vs. Bad Debt
Set Priorities with Your Bill Payments
We’ve talked about prioritizing your bills when money is tight, and now is a very good time to exercise these priorities.
Look at all of the bills, debts and other financial obligations you have and pay the most important ones first. Not paying your house payment or rent can leave you without a roof over your head.
If you are having trouble making either contact your mortgage company or your landlord right away, more options are available the sooner you ask for help. Not paying child support or taxes carries serious consequences.
If you can’t pay your child support be sure and keep the court aware of your situation. If you can’t pay your taxes, don’t skip filing your return. These bills should come first.
Utilities also come before credit card debt; don’t let your power be shut off or lose access to services you need to earn a living. If you can’t pay your utilities, call and explain your situation and determine what kind of arrangements can be made.
Any time you are making bill payment arrangements, keep a record and write down the day and time of your call, as well as the name of the customer service representative that spoke to you.
Only after these more important bills are addressed and paid should you focus on unsecured debts credit cards.
No matter how tough our situation seems, it’s possible to find a path forward that keeps your finances intact without destroying your credit score. Talk to a certified debt coach for free, confidential advice your unique situation.
Coronavirus and dealing with debt: Tips to help ease the impact | Consumer Financial Protection Bureau
This blog was originally posted on March 20, 2020 and was updated on June 17, 2020
Dealing with debt can be a stressful experience. As you plan for the potential economic impact of coronavirus, there are a number of steps that you can take to help manage debt in these difficult times.
Contact your lenders if you are at risk of missing payments
If you think you may fall behind on your payments for your mortgage, auto loan, credit card, student loan, or other debt, call your lender and explain your situation. Credit card companies and lenders may be able to offer you hardship programs, also called “accommodations,” to help you. In order to receive an accommodation, you must reach out to your lender proactively.
These programs may include allowing you to temporarily delay or adjust some payments. In some cases, you may be allowed to avoid interest charges. You may also be able to avoid negative credit reporting if you enroll before you become late on your payments.
Your lender may also offer longer-term programs, such as work-out plans that allow you to pay back debt over a set period of time at a reduced interest rate.
We’ve got more information on how to protect your credit from the impacts of the coronavirus pandemic, including new information on the CARES Act.
Many lenders are facing high call volumes because of the pandemic, so the wait time may be long. You can also check your lender’s website to see if they have information that can help you, ways to communicate electronically, or online applications for hardship programs or accommodations.
When contacting your lenders, be prepared to discuss your financial and employment situation, as well as how much you can afford to pay considering your income, expenses, and assets. You may also ask them:
- Do you have hardship programs for people experiencing financial loss due to the coronavirus pandemic?
- What are the financial consequences of enrolling in a hardship program?
- Will I owe more overall?
- Will this affect my credit limit?
- Will this affect my credit reports?
- If I am still having financial trouble at the at the end of the hardship program, what are my options?
If you currently have a debt in collections, you can work with collectors to identify a realistic repayment plan. We have a number of resources for contacting and negotiating with debt collection companies.
Know your rights. The Fair Debt Collection Practices Act (FDCPA) says that a debt collector is not allowed to use unfair practices in trying to collect a debt.
Learn about some examples of “unfair” practices by a debt collector
If you believe you do not owe the debt or that it's not even your debt, you may dispute all or part of the debt by calling or writing. If you send a written request, the debt collector must stop collection on any amount you dispute until the debt collector sends you information that shows you owe the debt.
Under other legal requirements, you generally cannot have your Social Security or VA benefits, as well as some other benefits, garnished by a lender or a debt collector.
Wondering how to respond to a debt collector?
Our sample letters* can help if you:
* These letters are not legal advice. You'll also want to keep copies of any letters you send.
Consider working with a credit counselor
Credit counseling agencies are generally non-profit organizations that can advise you on your money and debts.
When working with a credit counselor, you should be prepared to discuss your financial situation, employment status, and your financial goals, as well as your regular income and expenses.
When you work with a credit counseling agency, make sure that they can help you assess how to manage all of your debts. If you are also paying a mortgage, many also do housing counseling.
Reputable non-profit credit counselors often offer initial budgeting sessions at no cost. A non-profit credit counselor could help in the following ways.
- Help you identify ways to adjust your expenses so that you can pay your debts more quickly, as part of your initial free budget analysis.
- Assist you in sorting out the types of emergency hardship programs available to consumers by lenders and whether they make sense for your financial situation. This can be helpful if you have a lot of accounts or are having difficulty sorting through your options.
- Suggest that you consider enrolling in a debt management plan. These programs seek to provide a consolidated monthly payment that the credit counseling agency then pays to all lenders over a set period of time. This generally involves closing most of your accounts and setting a fixed repayment plan, usually at a reduced interest rate. Credit counseling agencies often charge fees for these services and there may be initial impacts to your credit worthiness due to closing accounts, so make sure you understand how the program works before you sign up.
- Help you determine if it would make more sense to explore bankruptcy and provide you with resources for next steps.
To find a credit counselor, you can try the Financial Counseling Association of America, on their website or by phone at (800) 450-1794, or the National Foundation for Credit Counseling, on their website or by phone at (800) 388-2227.
When researching debt relief options, make sure that you understand how the program works and potential risks of enrolling in it. There are many companies and organizations that advertise that they can help you find “debt relief” by simplifying or reducing your debt, “consolidating” your debt, or negotiating your debt. However, the actual programs offered can differ quite a lot.
You should make sure you understand whether the company is offering:
- A consolidation loan
- Credit counseling
- Debt settlement
- Or some other offering
Consider all of your options, including refinancing through balance transfers or loans, working with a nonprofit credit counselor, and negotiating directly with the lender or debt collector yourself.
Debt settlement companies, which may advertise themselves more generally as “debt adjusting” or “debt relief” companies, often claim they can negotiate debt reductions and offer to arrange settlements of your debts with lenders or debt collectors for a fee.
If a debt settlement company requires you to save up funds in an account:
- These funds still belong to you
- The account must be administered by an independent third party and be under your control
- You are entitled to withdraw funds held in that account at any time without penalty
Before agreeing to work with a debt settlement company, there are risks that you should consider.
- Many lenders will not negotiate with debt settlement companies. Also, many lenders and debt collectors will not negotiate how much they will settle for. Instead, they will have standard policies about how much loan principal they will forgive when you haven't made payments for a certain period of time. This means debt settlement companies usually can't get better terms than you could get by negotiating with your lenders and collectors yourself.
- Debt settlement companies cannot guarantee the amount of money or percentage of debt that you might save by using their services. They also can't guarantee how long the process will take. Beware of companies that say otherwise.
- Debt relief organizations cannot eliminate all of your debts; beware of programs that promise to make your debts “disappear.”
Beware of debt settlement companies that charge up-front fees in return for promising to settle your debts. Debt settlement companies can’t legally collect a fee before they actually settle or otherwise resolve your debt.
You should also be aware of the risks of stopping payments to your lenders. The risks include:
- You will ly damage your credit
- You may face collection efforts, additional late fees, and penalty interest charges
- These additional fees and charges will cause your debts to grow larger, so that debt settlement may cause your overall total debt-load to grow, even if the debt settlement company settles one or more of your debts
- You might be sued
If you are considering debt settlement, make sure you carefully read your contract before you sign so you know how fees are determined and how the program works.
Read more about debt settlement
Be wary of scams
Scammers seek to take advantage of consumers who are in distress. If the program seems too “good to be true,” it’s ly a scam. Avoid any debt relief or settlement organization that:
- Charges any fees before it settles your debts. Upfront fees are a major red flag for debt relief services, unless it’s a non-profit credit counseling program entering you into a program a debt management plan
- Claims that it will help you take advantage of “new government programs”
- Makes guarantees that it can make your debt go away
- Doesn’t explain the consequences of entering the program
- Won’t send you free information about services without requiring you to provide personal financial information
Also, be wary of “bait and switch” sales tactics, such as a “loan program” that requires you to enroll in a credit repair or debt settlement program first.
Consider legal representation or bankruptcy
In some situations, you may want to seek legal representation. For example, you may want an attorney if:
- You are sued by a creditor
- You have assets you want to protect
- If you are on Social Security or other income that has certain protections from debt collection
There are a number of ways to find an experienced attorney. Before hiring an attorney, it is a good idea to make sure he or she is in good standing with the state bar association.
You can also see if he or she has a disciplinary record.
You can find this information by searching the attorney’s name on the state bar website where the attorney is licensed, or by calling the state bar association.
Some attorneys may also offer free services or charge a reduced fee. There may also be legal aid offices or legal clinics in your area that will offer their services for free if you meet certain criteria.
If you simply don't have enough income to pay what you owe, you may also consider filing for bankruptcy. Bankruptcy is designed to give you a fresh start while providing legal protections from most debt collection efforts.
There are long term financial and legal consequences for bankruptcy, so you should consult a bankruptcy attorney to learn more. Other resources on bankruptcy can be found at the U.S.
Department of Justice website: a bankruptcy information sheet and frequently asked questions about bankruptcy .