How to handle credit card debt while unemployed

By Helen Fowler

Credit card debt in the UK has increased along with unemployment rates. According to the Bank of England, the annual growth rate in the country's credit card lending is now the highest since February 2010. If you find yourself among the hundreds of thousands out of work, here is how to handle your existing credit card debt, and how to avoid racking up too much more.

Be upfront with your credit card provider
When you lose your job, you may want to hide under the duvet and ignore the phone. unemployment-and-debt

"But your best bet is to contact the credit card company immediately. Let them know what has happened," says Andrew Whiteley, managing director of Provisio Chartered Financial Planners. "The company might offer you a payment break."

Simon Webster, managing director at Facts & Figures, agrees. "The worst thing you can do is pretending it's not happening," he says.

It's in the card provider's interests to help you work through the crisis because they stand a better chance of recovering what's owed to them by reaching some kind of agreement with you.

"They don't want to have to write off the debt altogether," says Michelle Gibbs, chartered financial planner at Helm Godfrey. By acting responsibly and speaking to the card provider before you get into trouble, you are more likely to receive favourable treatment.

Even paying the monthly minimum means you won't damage your credit score or incur penalty fees. It is worth protecting your credit score, because, among other things, a good score will help if you apply to transfer your balance to a lower-interest card.

Switch your balance to a low- or no-interest card
"If you've got credit card debt, make sure it's on 0% interest," advises Webster. Switching your balance to a card with lower interest can potentially save you a lot of money. You may not be able to reduce the debt itself while lacking a regular income to pay down borrowings, but you can minimise the interest payments.

These cards typically come with a one-off balance transfer fee, which can run around 4%. That's a considerable sum if your balance is large, so it's worth shopping around to find the most advantageous deals.

If you cannot pay off your debt within the limited period most 0% interest cards offer, you might be better off with a "rate for life" card. These products lock in one rate for the duration of the repayment period. It will be higher than 0% but you'll avoid the extreme increase that is often imposed after intro deals wear off.

Don't use your card anymore
Once you have transferred the outstanding balance, a smart next step might be to destroy your new card, whether physically or metaphorically.

And whatever else you do, avoid cash advances on your card. These may be tempting, but come with high interest rates and fees -- some cards charge nearly 25% APR for cash advances.

Try not to look on a credit card as a replacement salary. It's better to pay cash so you'll feel the pain of parting with every coin and note.

See related: Brits lack redundancy safety net, On the job hunt? Check your credit report first 

Published: 27 November 2013