For those seeking financial stability after a layoff, aside from unemployment benefits and severance packages, credit cards may also be a means to supplement income. But they should only be used as a last resort.
â€śItâ€™s difficult to live off of credit cards unless you can see your way out of it,â€ť says Genevia Gee Fulbright, president and certified public accountant at Fulbright & Fulbright. â€śYou donâ€™t want to end up filing for bankruptcy,â€ť she adds.
Cash reserves should always be the first line of defense, says Kevin Davis, a certified financial planner at Consolidated Financial Services.
Other alternatives include taking out a line of credit, and if worse comes to worst, tapping into your 401(k) plan.
You can set up a 72(t) account, which can set up automatic withdrawals from your 401(k) without any penalties, he says.
Hereâ€™s how it works: You rollover your 401(k) to an IRA and apply with the IRS for a 72(t). The IRS will set up a distribution method, however, once an income stream is set up, it must continue until age 59 Â˝ or for a minimum of five years, whichever comes last, which would be a drawback for younger people.
If you really donâ€™t have a choice except to use credit cards, check out these tips on charging wisely:
Compare teaser rates and out-of-work time: If youâ€™re looking for a new card, compare the introductory rates from prospective companies with how long you expect to be out of the workforce.
â€śIf you feel like you can pay the card off in 12 months, do a 0% interest rate [if it is offered],â€ť Davis says. Since the offer only lasts if the balance is paid down by the time the promotional rate ends this may not fit everyoneâ€™s needs. If you donâ€™t think the balance can be paid off within the allotted time, opt for a bit of a higher rate that will remain the same so you wonâ€™t be surprised by spiraling finance fees once the introductory period is over.
Pay on time: Sure, itâ€™s a given, but does it always happen? One missed or late payment can hike your interest rate to 18% and in some cases even 27%, says Davis. To avoid late payments Davis suggests setup up an automatic payment plan.
Determine necessity: A designer bag or HDTV is not a necessity. Credit cards should only be used to pay for staple items — food, shelter, utilities, etc. â€śIf you lose your job the first thing you should try to do is get your expenses as low as possible. Use credit cards to pay fixed expenses,â€ť Davis says.
Actively manage your debt: Davis recommends using a Microsoft Excel spreadsheet or other software to track your spending. â€śYou need to know youâ€™re building