Protect Your Credit When Income Declines

Are you one of the millions of people whose income has diminished this year? Whether it’s a job cut, the credit debacle, the gasoline crisis, or another cause of reduced funds, the result can be the same: Your income no longer supports your life style.

A significant income cut requires drastic action. You’ve got to get a grip! Although losing a job or experiencing any major financial loss can feel like a kick in the gut, you don’t need to create a drop kick by ignoring your financial reality. If you need credit in an emergency, you want to do your best to keep your options open. Pretending your income has not changed while amassing credit card debt can lead to a financial tragedy far worse than your income reduction.

First, you must know your living costs. “Live” means keeping a roof over your head; your utilities turned on; nutritious food on your table; paying insurance premiums; basic personal care such as hair cuts, toiletries, etc; keeping your car serviced plus buying gas; and any other life-supporting essentials. You also need the tools to conduct a job search or earn income – telephone, Internet, fax, etc. You’ll notice that “living” doesn’t include designer coffee, eating in restaurants, various forms of entertainment with a price tag, weekly manicures and pedicures, or other non-essentials.

It’s been surprising (to me) how many people are unaware of what is essential and what is not. Starbucks – much as we love it – is not essential. Buy one of those large, attractive Starbucks thermal mugs. Make your own coffee and carry it in the Starbucks container, as if you just popped in for a fill-up. The container will pay for itself in a week. After that, you’ll save $60 dollars a month. That’s about the cost of many monthly phone bills.

Some budget advisors insist that cable TV and Internet access are luxuries. Basic expanded cable (no pricey premium channels) plus watching movies checked out free from the library may be your only form of media entertainment for a while. It makes no sense, in our media-driven world, to cut off all access. Keep your cable. For many of us, the Internet is integrated into our lives as a basic tool. It’s where we go to search for everything from jobs to housing to grocery ads to news. If you use the Internet as a productivity tool, ignore those “budget” fixers who tell you to use it at the library.

Key indicators show the economy is likely to continue on its downward slope into 2009 with ongoing job elimination by many employers who have run out of alternative cost-cutting measures. As we head into second half of the year, think about what you can do to create personal financial independence and protect your much-needed credit rating.

Do you have bills you cannot pay? When an unexpected financial set back occurs, this is normal. As soon as you know you cannot pay a debt, call the creditor. Explain your situation. If you have no idea when you can pay it, tell them. A creditor can freeze a debt for you, allow you to make a token good faith payment, such as $5.00 per month, until you find employment or solve your financial crisis. When you let them know you can begin making payments again, they will return the account to an active status. In many cases, for customers who have had a positive payment history before a temporary crisis, no interest will be charged while there is a freeze on your account. The key is to talk with your creditors as soon as you know you have a cash flow problem.

While this advice is oriented toward personal credit, the same principles apply to business credit. You want to protect your business credit rating as well. Small businesses are likely to discover creditors are quite accommodating during an economic downturn. They want you to continue to purchase from them when you recover from a slump.

Five steps to protect your credit when your income declines:

1. 1. Accept the seriousness of your situation.
2. 2. Determine your essential living costs.
3. 3. Decide if you have enough income to pay all your debts?
4. 4. Contact any creditors you cannot pay; make alternate arrangements.
5. 5. Focus on finding a solution – new job or another source of income.

Long term, eliminating as much debt as possible will create a foundation of independence from which you will more easily navigate future financial challenges.