Job loss changes credit card usage rules

If you already lost your job or expect to get a pink slip in the near future, throw out some commonly held bedrock principles for using credit cards. Your No. 1 priority is to conserve cash (CreditCards.com Sept. 17).

In good times, the rules are clear: Pay credit card bills in full, or at least pay more than the minimum due. Use windfalls--tax refunds, bonuses, inheritance--to make extra payments and zero out existing balances as quickly as you can. Use credit cards for emergencies.

When faced with a job loss, the rules change. It's not a good idea to use credit cards as a fallback. If you've relied on credit cards because the equity in your home dried up, you already may be overextended. And lingering economic troubles could make it difficult to find another job--up to six months or more (Walletpop.com Sept. 20).

Follow these revised rules so job woes don't turn into credit card woes:

• Build an emergency fund first, then reduce card balances. When faced with the choice of saving vs. paying down debt, experts agree that beefing up your reserves--to at least six months of living expenses--takes precedence during hard times. At the same time, continue to make minimum payments on all debts: Draw up a budget and cut out or cut back on anything that's not necessary. Find spending leaks by tracking where your money goes each day. Stash the cash you save in an insured account. Obviously, building your emergency fund will be easier before you lose your job.
• Avoid late payments. The late payment fee is the least of your worries: Employers can look at your credit report before hiring you. If you're unemployed, missing payments, and your credit score drops, you're less likely to get hired.
• Drastically cut back on credit card use. You don't want your balances to balloon out of control if you're unemployed or think a layoff is looming.
• Don't use credit cards to prop up your lifestyle. The sooner you make changes to your spending habits, the less likely you'll wind up in credit trouble if your job search drags on for several months.
• Stop thinking of plastic as a financial backup plan. Card issuers can reduce your credit lines at any time, and new credit is not easy to get. Experts advise you use existing lines of credit wisely. Even a small increase in spending could trigger a review by some bank card issuers, and changes could result in higher interest rates or lower credit limits, which could hurt your credit score.
• Switch to cash when you can, but avoid cash advances. Pulling out cash makes you more conscious about your spending, but using cash advances will cost high interest rates and fees, leading to even more debt.

Finally, this rule holds true in good times and bad: Come clean with your creditors. Don't wait until you miss a payment. Call creditors and explain your situation--the advance warning likely will give you more leverage if you need to negotiate a payment plan. Ask if they'll temporarily lower your monthly payments and reduce interest. Do this before your situation becomes dire.