Keeping Up with Credit Card Debt During a Financial Crisis

Credit cards can be vital tools in times of financial uncertainty, but it’s important to be aware of the potential pitfalls. [Duration- 2:49]

Highlights:

• Credit card debt can hurt your credit history.
• There are smart strategies to follow when using credit cards.
• There may be credit card debt relief options available through your credit card issuer.

Many people rely on their credit cards to help cover mounting bills and other essentials. In times of financial crisis, credit cards can be a vital tool. However, spending more than you can reasonably pay back and leaving debt unchecked can hurt your credit history and create bigger financial problems.

If you've been using credit cards and growing your balances, be sure to also follow these strategies for good financial behavior:

• To keep your account in good standing, always make the minimum monthly payment
  A minimum payment is the lowest amount you can pay on your credit card to keep your account in good standing. You can always pay more than the minimum and it's better to pay your balance in full, but the minimum is the amount you must pay before your account is considered to be overdue.
  
  If you're unable to keep up with your minimum payments, the creditor will mark your payments late. Late credit card payments will show up as a negative mark on your credit reports. Late payments can significantly drag down your credit scores and may stay on your credit history for up to seven years.
   
• Try to pay more than the minimum to reduce your balance
  Ideally, you should pay more than the minimum each month (and pay the full balance if possible). When you only pay the minimum, you end up carrying debt from month to month, and your debt increases even further as you accumulate interest charges.
  
  However, if it is not possible to pay more than the minimum right now, it is okay to pay just the minimum and catch up with your additional debt later.
   
• Avoid canceling your credit cards, even if you're not using them
  If you're trying to avoid spending money you don't have, it may seem logical to cancel your credit cards entirely. But keeping your accounts open, and not running up any more charges, can improve your credit scores.
  
  This is because of your credit utilization rate (or debt-to-credit ratio), which compares the amount of credit you are using to your total available credit. It is better to have a lower credit utilization rate. By keeping your credit card accounts open but not adding to your balance, you have a higher available credit and a lower credit utilization.
  
  For example, if you have $10,000 of available credit, but you only owe $3,000 across all accounts, you would be using just 30% of your available credit. But let's say you cancel one of your credit cards and your available credit drops to $5,000. Suddenly, you're using 60% of your available credit, which means you have a much higher debt-to-credit ratio and you look like a much greater risk to lenders.
   
• Take advantage of credit card rewards programs
  Depending on the type of credit card account you have, you may be able to accumulate reward points. Types of rewards include gift cards, discounts on food delivery and deals on household items. If you're already using your credit card to pay for essentials, it's worth checking to see what sorts of rewards your credit card issuer offers. You may be able to get something back for the purchases you're already making.
   

Credit Card Debt Options

Reach out to your credit card issuer directly and ask for help. Payment holidays for up to three months, deferred payments and delayed principal payments are a few plans that creditors may negotiate. Borrowers with a long history of on-time payments have an even better chance at negotiating a repayment plan.

Credit Card Forbearance

The credit card debt relief options available to you will vary, but some card issuers offer forbearance programs that may let you pause payments without late fees, waive late fees, or with lower interest rates. When you are enrolled in a forbearance program, your credit scores won’t be negatively affected by late payments.

However, the credit card interest is not always waived. If your card balance continues to accumulate interest charges, the balance will continue to increase during the forbearance period with the interest charges. This can result in a higher credit utilization rate (which is the percentage of your total credit you’re using) and add more debt which can lower your credit scores.

Some of these programs may require proof that your finances have been impacted by a job loss or reduction in working hours, so be prepared to provide the necessary documentation.

When entering into a modified payment plan with your credit card company, you need to understand what you're signing up for. Here are some clarifying questions to ask your credit card issuer:

• If my monthly payments are temporarily deferred, will interest accrue during this period?
• How long will this relief last? Is an extension possible if my financial situation hasn't changed when the forbearance period expires?
• What information will be shared with the nationwide consumer reporting agencies?
• Will I still be able to use my credit card for purchases during this relief period?

Make sure to get any agreement you reach in writing and then check your credit card statement monthly to make sure everything is correct.

You also should monitor your credit reports to confirm that your credit card payments are being reported accurately. For example, if your credit card issuer agrees to defer your payments, they could mistakenly report your payments as late. As long as you adhere to your agreed upon terms, your payments should be reported as “current”."

Checking your Equifax^® credit report can help you find any incorrect information from a credit card issuer. You can receive free Equifax credit reports with a myEquifax account. Just look for “Equifax Credit Report” on your myEquifax dashboard. You can also get your free Experian^® and TransUnion^® credit reports at annualcreditreport.com.