Handling a Credit Crisis in Retirement
Sometimes a credit crisis is unavoidable, perhaps due to a lost job or a significant health issue. In those situations, communication with creditors is critical. In nearly all cases, talking with creditors sooner 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. While this will lengthen the time to pay down the debt and may result in paying more finance charges over the long run, it could allow you to meet your monthly essential expenses and prevent further damage to your credit history.
- If a debt situation becomes intolerable, contact the National Foundation for Credit Counseling (www.nfcc.org). Their credit counseling agencies 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 typically will 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. In addition, balance transfer fees generally will be charged, which decrease the amount of interest rate savings. 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, it's best to avoid the following lenders if possible:
- 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 lenders will outweigh the benefits you might gain. Better alternatives could include a small dollar loan from a credit union.