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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.
“It’s difficult to live off of credit cards unless you can see your way out of it,â€ says Genevia Gee Fulbright, president and certified public accountant at Fulbright & Fulbright. “You don’t want to end up filing for bankruptcy,â€ 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.
Here’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 Â½ or for a minimum of five years, whichever comes last, which would be a drawback for younger people.
If you really don’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 you’re looking for a new card, compare the introductory rates from prospective companies with how long you expect to be out of the workforce.
“If you feel like you can pay the card off in 12 months, do a 0% interest rate [if it is offered],â€ Davis says. Since the offer only lasts if the balance is paid down by the time the promotional rate ends this may not fit everyone’s needs. If you don’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 won’t be surprised by spiraling finance fees once the introductory period is over.
Pay on time: Sure, it’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. “If 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€ Davis says.
Actively manage your debt: Davis recommends using a Microsoft Excel spreadsheet or other software to track your spending. “You need to know you’re building
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