Certain life events can derail your Credit Zen…
Let’s be real. Most people don’t face challenges with credit card debt because they spend frivolously and forget to pay their bills. Some people do, but more often than not, people are forced to take on credit card debt due to extenuating circumstances that are beyond their control.
Even if you good credit, a well-balanced budget, and a good financial safety net of savings, it doesn’t always guarantee you can maintain financial stability. Certain unexpected life events can arise that can derail even the best strategy. When one of these events happen, it can lead to massive credit card debt and credit score damage.
In this article, we’ll explore four root causes of credit card debt, so you can understand what outside factors that can drive you into financial hardship. If you’re facing one of these challenges, we offer some advice that can help you recover quickly. We also offer some tips that can help you prepare for the worst, so you can weather any financial storm that may come.
Jump to one of these sections:
Cause No. 1: Unemployment and loss of income
Income creates the foundation you need to build a stable budget. So, losing your main source of income or having it cut can quickly send you crashing into debt problems. The unemployment rate in US sits at 3.5%, which is fairly low.[1] However, many experts say we may be headed for another recession soon. If that’s true, unemployment could rise.
Losing your job, getting laid off, or just getting fed up and quitting can interrupt the flow of income that keeps you stable. Even if your hours at work get cut or your boss decides to limit the amount of overtime you can work, it can throw your budget off balance.
What to do if you’re broke, unemployed and in debt
- Aggressively pursue new employment opportunities – treat finding a job as your full-time job
- Pick up a part-time job, freelance work or a side gig like driving for Uber or Lyft to get at least some income while you look for full-time employment
- Check your home for any items you can sell online
- If possible, reach out to family or friends for a loan to help you get by
- Use credit cards as a last resort to cover expenses you can’t afford to skip
- Avoid payday loans at all costs because you won’t have the money to repay them within the 2-week window, which means you’ll face interest rates of up to 400%.[2]
- If you can’t make your mortgage payments, call your lender before they call you. You may be able to qualify for forbearance, which can temporarily pause or reduce your monthly payments.
- If you have federal student loans, apply for deferment to temporarily stop your payments. Some private lenders may also provide deferment or forbearance.
Once you get a new job, take stock off where all your debts stand. Note the status of each debt, the balance and the APR. If you’re behind on credit card payments, call the company to negotiate. They may be willing to assist you, such as freezing your account and temporarily suspending interest charges until you catch up.
Tips for avoiding credit card debt during a period of unemployment:
- In a normal economy, you should have an emergency savings fund that covers 3-6 months of bills and other necessary expenses. This will help you get through a period of unemployment without relying on credit cards.
- In a weak economy or recession, you should increase this safety net to cover 6-12 months, since it can be difficult to find a job during a weak economy.
- Since this is such a large volume of money to save, look into products that offer better rates of return, such as Money Market Accounts (MMAs) or Certifcates of Deposit (CDs)
Cause No. 2: Death of a spouse
When your spouse passes away, the emotional burden is immense. The last thing you need is add a financial burden on top of it. If you don’t have the appropriate life insurance policies in place, even the cost of the funeral can overwhelm your finances. Just paying for the casket costs $2,000, on average.[3] With funeral fees and services and all the extra add-ons, it can easily cost upwards of $10,000-$20,000 to bury a loved one.
Tips for getting your finances in order
- Make
a list of all the financial issues you’ll need to address as you move forward:
- Funeral service and burial costs
- The oversight and distribution of your spouse’s estate
- Transfer of finances, such as investments
- Taxes
- Insurance payouts
- Gather
up all relevant documentation you can find, including:
- Wills, estate and trust documents
- Insurance policies
- Tax documents
- Retirement plans, mutual funds and other investments
- Birth and death certificates, as well as your marriage license
- Military discharge papers, if your spouse served
- Make 10-15 copies of the death certificate to provide to lenders, insurers and financial institutions that may require it
- Determine
if you will need to probate your spouse’s estate
- The probate will determine if a will exists and if it is valid
- The probate will distribute the assets as designated in the will or by law if a will doesn’t exist
- If you don’t need probate, you may still be required to file the will with the courts within a certain number of days of your spouse’s death; this is required in most province
- Set
a new budget based on your sole income
- You will likely need to downsize and find expenses you can cut, assuming that your spouse contributed as significant portion of your household income
Tips for avoiding financial distress after the death of a spouse
- There are two key components to avoiding leaving your family with a financial burden if you pass away:
- Establish a will that divides your assets and designates people as your inheritors
- Make sure to get the appropriate life insurance policies in place. Most experts recommend that you should have coverage equal to 7-10 times your annual salary.[4]
- Also, consider disability and critical illness insurance, that will cover your family if you become permanently disabled.
Cause No. 3: Divorce
Approximately 40-50% of all marriages in the U.S end in divorce.[5] Going through a divorce can easily lead to debt. Certain debts may become your responsibility to repay in the divorce decree. You also have the cost of getting divorced. Trh average divorce costs about $15,500, including $12,800 for attorney’s fees; if your divorce goes to trial, those costs increase to $19,600.[6]
Tips for navigating divorce with your finances intact
- Make every attempt to keep the separation amicable. If you can work things out, either on your own between the two of you or with mediation, you will be better off.
- Make copies of any relevant financial documents you’ll need. This includes:
- Joint bank accounts
- Credit cards
- Brokerage statements
- Tax returns
- Business interests
- Retirement funds
- Loans
- Insurance
- Mortgage documents
- Wills and trusts
- Appraisals of assets (artwork, antiques)
- Once your debts are divided in the divorce decree, take your name off joint accounts your ex will be responsible for paying.
- If you don’t take your name off an account and your spouse defaults, your credit can be ruined!
- For the accounts that are your responsibility, make sure to convert them to individual accounts.
- You also want to make sure your spouse is removed as an authorized user on any account, so they can’t use your credit.
- Set up checking and savings accounts in your name. Close any joint accounts and shop around to find accounts that will fit your needs.
- If you need to establish credit, consider getting a secured credit card. If your credit score is low, you can open a secured credit card with a small cash deposit. This will allow you to start building credit.
- Create a new budget to make sure you can afford all your expenses.
- Even if you get the house or a car in the divorce decree, you may not be able to afford the payments. You may need to sell the property and downsize before you face repossession or foreclosure.
- See if your current level of income can support your household. Ideally, you don’t want to rely on alimony or child support payments, which may not be guaranteed to come in on time.
Tips for navigating divorce with your finances intact
- Make every attempt to keep the separation amicable. If you can work things out, either on your own between the two of you or with mediation, you will be better off.
- Make copies of any relevant financial
documents you’ll need. This includes:
- Joint bank accounts
- Credit cards
- Brokerage statements
- Tax returns
- Business interests
- Pension funds
- Registered savings plans
- Loans
- Insurance
- Mortgage documents
- Wills and trusts
- Appraisals of assets (artwork, antiques)
- Once your debts are divided in the
divorce decree, take your name off joint accounts your ex will be responsible
for paying.
- If you don’t take your name off an account and your spouse defaults, your credit can be ruined!
- For the accounts that are your responsibility,
make sure to convert them to individual accounts.
- You also want to make sure your spouse is removed as an authorized user on any account, so they can’t use your credit.
- Set up chequing and savings accounts in your name. Close any joint accounts and shop around to find accounts that will fit your needs.
- Create a new budget to make sure you
can afford all your expenses.
- Even if you get the house or a car in the divorce decree, you may not be able to afford the payments. You may need to sell the property and downsize before you face repossession or foreclosure.
- See if your current level of income can support your household. Ideally, you don’t want to rely on spousal or child support payments, which may not be guaranteed to come in on time.
- If you need to establish credit, consider getting a secured credit card. If your credit score is low, you can open a secured credit card with a small cash deposit. This will allow you to start building credit.
Tips for ensuring you don’t face financial hardship because of divorce
- The best way to avoid a bad divorce may be to consider signing a prenuptial agreement before you get married. A prenup will lay out how marital assets and property will be divided. This can avoid disagreements that lead to a contested divorce.
- Get familiar with the rules for division of property in your state. The rules governing the division of property and marital assets are determined where you live. Some states are community property states, which means assets amassed during the divorce get divided equally. Understanding these rules can help you know how the divorce will proceed.
- Don’t try to hide assets from your spouse. Opening secret bank accounts to hide assets from the court. It will not be taken well.
Cause No. 4: Natural disasters
Almost every state in the U.S. faces natural disasters ever year. Depending on where you live, you may face hurricanes, flooding, wildfires, tornados, and winter storms. These big weather events can often come with little warning, which can make it difficult to prepare.
A bad natural disaster has the potential to wipe you out, both physically and financially. You may lose property, including your home and everything you and your family have amassed over the years. There are steps you can take to prepare for the worst, which we outline below. But depending on the size and scope of the disaster, it could still leave you in dire financial straits.
Tips for recovering after a natural disaster
- If you are concerned that you won’t be able to pay your bills, reach out to your lenders and service providers to ask about grace periods on your payments. Many companies will temporarily suspend payment for victims who live in a disaster area.
- Check your insurance policies to make sure you know what’s covered for property loss and damage. Call your insurance company as quickly as possible, since they may be handling a large volume of claims.
- If the business you’re working for closes as a result of a disaster, file for unemployment promptly.
- Watch out for scams! Be careful about giving out your personal information. Although banks and insurance companies will need details like your Social Security number, scammers often take advantage of people in disaster areas to steal their information.
- If you need to make repairs, get multiple quotes from licensed, reputable contractors. Make sure to check licenses and review your contract carefully before you sign. You can also talk to neighbors to see how much they are paying for similar work.
- Don’t pay for any work upfront. Work should be done, and all inspections and approvals completed before you pay.
- Make sure you have the proper permits for any work being done, so you can avoid fines.
Tips for preparing your finances ahead of a disaster
- Make sure you have proper insurance coverage and review your policies each year.
- If you’re a renter, talk to your landlord about what damage they would cover after a disaster and get renters insurance to protect your property inside the home.
- Take pictures of your property so you have proof of ownership and the condition of each item.
- Consider keeping receipts for valuable items so you have proof of what you paid and when the items were purchased.
- Keep important documents, such as birth and marriage certificates, loan agreements insurance policies, deeds, wills, property titles, and receipts for valuable items in a watertight container or folder, so you can grab your financial documents quickly in case you need to evacuate.
- Write down important contact information, such as the insurance claims phone number, which may be different from your agent’s number. This will help you quickly make claims, even if you were forced to evacuate.
