Handling a Credit Crisis in Retirement

Sometimes a credit crisis is unavoidable, perhaps due to a lost job or a significant health crisis. In those situations, communication with creditors is critical. In nearly all cases, talking with creditors early rather than later will yield you more favorable results.

 

Dealing with a Credit Emergency

  • Ask your creditors for more favorable lending terms: lower finance charges and a lower minimum monthly payment. This will lengthen the time to pay down the debt and may result in paying more finance charges over the long run--it could prevent your utilities (for example) from being cut off in the short term.
  • If a debt situation becomes intolerable, contact the National Foundation for Credit Counseling (www.nfcc.org). This organization will help you take control of your spending and work out an affordable repayment plan.
  • Protect your financial assets while you’re in a credit crisis. Avoid services that claim they can “eliminate” debt or “fix” a credit score. You will typically spend a lot of money for these alleged services and may end up in a worse credit situation.

Avoid Credit Traps

Wise use of debt in retirement also means avoiding credit traps. Repeated rolling of a debt from one credit card to another, for instance, can lower your credit score. Unless a credit card interest rate reduction is significant, such as a drop of 4 or 5 percent or more, moving a debt around is only delaying the inevitable. Rather than moving a debt around, pay down the debt as aggressively as possible instead. Or consolidate many higher-rate debts into one at a lower rate, if possible.

No matter how bad your credit crisis may seem, steer clear of the following lenders:

  • pawnshops
  • check-cashing stores
  • cash-advance firms
  • payday lenders
  • rent-to-own companies
  • auto title loan companies

In nearly all cases, the costs of using one of these so-called “loan shops” will far, far outweigh any benefits you might gain.