How to Use Credit While Unemployed - dummies

By Steve Bucci

You need to protect your credit while unemployed. Many people lose their jobs, often more than once. But if you’ve established savings and you have some available credit, you have two tools to help get you through this time without damaging your credit or your employment prospects. You can put together a new plan that includes finding a new job and a budget that works while you do so.

Stay away from using cash advances on your credit cards! Spending money this way is much more costly than simply using the credit card to pay for items. Cash advances incur an extra fee, usually have a much higher interest rate than purchases, and often have a lower limit than your credit limit.

Look at credit differently

When you’re unemployed, you move from spending resources to conserving them, a situation that calls for you to change your credit use priorities and start looking at credit differently. While you were employed and earning a regular income, you may have used credit differently than cash. You also may have used it for larger purchases that you needed some time to pay off.

When you’re unemployed, possibly for longer than you anticipate, you don’t have those earnings coming in (you may have funds from a severance package or unemployment benefits, but they’re only temporary, and they may not last as long as your unemployment does).

With little to no funds coming in, you may need to use credit for basic living and job-hunting expenses only. This is just about the opposite of what most people advise, but you’ll do it for a limited time and for a specific, worthy purpose. If it helps, think of this approach as borrowing money for a surefire investment: you and your future.

Preserve your cash for as long as possible by using credit first. You want to keep your cash because you can’t replace it after it’s gone. This advice may contradict what you’ve heard in the past. Conventional wisdom says to control expenses by paying cash for as many things as possible. But when you’re unemployed, within reason and as part of a plan, the opposite is true.

Use credit for essentials and save the cash. You can limit your overall spending to just the essentials by closely following a budget.

Refigure the family budget

With your reduced resources, cutting back your spending to only basic needs is essential. Begin by sitting down with your family and discussing the situation and the need to reduce expenses temporarily. Don’t be embarrassed in front of the kids. This situation is an important lesson in reality for them. And you can show them how adults face difficult issues and win.

If your severance is being paid out over time or you haven’t yet received it, ask your employer to raise your tax deductions to the maximum allowed. The IRS wants a report of anyone with more than ten deductions, so you should generally ask for ten (after all, you don’t want the IRS looking at you unnecessarily).

This strategy results in more cash flowing through to you now, when you need it. Yes, you may owe some taxes on this money in April (though your deductible job-hunting expenses and reduced earnings for the year may offset that). But you want to maximize today’s income at the possible expense of tomorrow’s demands.

Get credit counseling to help

If you’re overwhelmed and think you can benefit from some professional perspective or guidance, go to an accredited credit counselor.