How to pay off debt while unemployed during coronavirus

Unemployment and debt are major concerns during the Coronavirus pandemic. Here are some options to help you stay afloat. (iStock)

If you’re one of the record numbers of Americans who are now facing unemployment and debt during the coronavirus pandemic, you are not alone. As more than 30 million jobless claims have now been filed in the U.S. following the spread of the virus, many people are seeking money tips on how to stay afloat — specifically by paying down debt.

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Luckily, in these trying times, there are a number of budgeting tools and debt strategies available to help manage payments on your student loans, mortgage and credit card debt. Additionally, there are steps you can implement to take control of your money and to make sure you’re managing your money effectively.

How to pay your bills after losing your job

Recently, the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act passed, which should provide some relief (plus debt payment options) for borrowers. It extends unemployment to include independent contractors and gig workers, expands benefits to include a $600 per week supplement, and includes forbearance options for federally-backed mortgages.

As for how to pay off debt when money is tight, Dr. Anthony Criniti IV, an author of several acclaimed finance books, including “The Necessity of Finance," recommends taking the following steps:

Refinance your debt. If interest is making your payments too large to handle, consider refinancing your debt. Interest rates — and mortgage rates — are low right now, so you should be able to make a dent in your monthly payments. If you're interested in going this route, use Credible to compare lenders and find the best rates in order to lower your monthly payments and eventually reduce your household debt.

However, keep in mind that in order to close on a new loan, you’ll still need to pay closing costs.

Taking out a home equity line of credit (HELOC). If you own your own home, Criniti says that taking out a HELOC can often give you access to the funds you need at a more affordable interest rate than a credit card.

He cautions, however, that if you default on these loans, you could be putting your home at risk.

Check your cash flow. Criniti recommends accessing any available funds first, such as tapping into your emergency fund and selling excess goods to focus on paying for essential items. The big positive about these options is that you aren’t taking on any new debt.

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Opening up a balance transfer credit card. Lastly, Criniti recommends opening up a balance transfer credit card to temporarily manage your debts. These credit cards often offer an introductory 0 percent interest rate, which means that any amount you pay during that period will go towards your principal balance. Credible can help you compare balance transfer credit cards instantly to determine which one can best fit your needs.

After it’s over, though, you could be subject to a substantial interest rate.

How to handle credit card debt while unemployed

Credit card debt can be one of the most difficult types of debt to manage while unemployed. High-interest rates mean that it can pile up fast and quickly get out of hand. That said, there are ways to make sure it stays manageable.

“Talking to your lender is the first step,” says Criniti. ”They understand what’s going on right now and they want to help.”

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For their part, many credit card issuers have created relief programs in response to the pandemic. While each issuer’s program differs, most are offering forbearance options that may allow you to temporarily waive interest to lower your minimum payments or to defer payments entirely for a set period of time.

Criniti advises taking the initiative and advocating for yourself when communicating with lenders. “Don’t be afraid to negotiate,” he explains. “Lenders would rather be paid a portion of what you owe than nothing at all.”

What happens if my debt piles up during the coronavirus crisis?

If you stop paying your bills entirely while you’re out of work, it could have serious consequences.

For one, missing payments will have a negative impact on your credit score. As Criniti says, “Every time you miss a payment, it’s reported to the three credit bureaus. That could hurt you in the future when you go to open a new credit card, take out a personal loan, or buy a house.”

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However, depending on what type of loan it is, the downsides of missing a payment could be even more severe. With secured debt like a home equity loan or HELOC, you could end up losing your home or another asset.

At the end of the day, managing unemployment and debt during the coronavirus pandemic is not easy, but it’s better to be proactive than to let your debt get out of control and wreak havoc on your bank account.