Managing Credit Card Debt on a Tight Budget
Over half of Americans live paycheck-to-paycheck, and additional financial stress has been added since the worldwide spread of the coronavirus. The COVID-19 pandemic is responsible for more than 40 million Americans being unemployed and having to file for unemployment benefits, causing many to struggle to pay their bills.
When living on a tight budget, your credit card can serve as a lifeline for you when you don't have money in the bank. Unfortunately, dependency on credit cards can lead to being more rooted in debt. The other issue that can arise is that if you're already on a tight budget, borrowers may decide to skip a credit card payment in an attempt to hold on to the few dollars they have remaining or because they simply don't have the money to pay. However, abandoning your credit card payments can lead to several negative consequences.
Below are two common repercussions for ditching your credit card payments and one way to help you avoid those consequences.
Missing more than one payment can result in late fees on your credit card. When you can't pay the full balance (to avoid interest), at least pay the required minimum payment to avoid paying an additional $30 to $40 in late fees. Your credit card company can report your late payments to the credit bureaus - Experian, Equifax, and TransUnion. Reported late payments can lower your credit score and stay on your credit report for up to seven years.
High Penalty Rates
If you miss one payment, it could result in a late fee. If you miss more than two consecutive payments, it can result in a high penalty annual percentage rate (APR). A penalty APR is when a card issuer imposes a penalty on the cardholder due to late payments, which results in the cardholder paying an interest rate as high as 29.99% monthly. The penalty will likely extend the amount of time and money the borrower must pay to pay off the debt in full.
Communication is critical in any relationship, especially when dealing with your finances.
Communicate With Your Creditor
It's vital that you keep an open line of communication with your creditors and explain your financial situation. You don't want to ruin your relationship with your creditors because it can hurt your chances of receiving a credit line in the future. Ask your creditors if they have any debt relief options available, especially if it is during a downtown of the economy or the current pandemic. Some creditors can issue a lower or deferred payment, waive late fees, reduce your interest rate, or possibly establish a plan to help you pay off the debt that you can afford amid the global crisis. Either way, you won't know unless you call and ask.