What should I do now? It’s a fast-growing and widespread concern when it comes to managing money in the middle of a global pandemic. You have many questions, whether you’re struggling with credit card debt, considering tapping your 401(k) or facing uncertainty about how to cover costs for your small business.
I’ve been talking to some experts about some of your financial worries. Though it’s always best to speak to your own financial advisor about your specific situation — and there are many certified financial planners now offering free help — here are some suggestions you can consider doing right now.
Will credit card companies entertain lowering the current annual percentage rate on present balances?
Here’s a ray of light for borrowers struggling to pay off credit card debt. Most credit card companies will consider lowering the interest charged on your current balance. Be upfront. Contact the creditor. Let them know your current financial situation and that you need some leeway in paying off your debt.
A March 2020 survey by CompareCards.com found that 1 in 7 cardholders cited the COVID-10 outbreak as the reason they didn’t feel confident about paying their credit card bills in full this month.
Many credit card companies are offering varying degrees of assistance. For instance, American Express said in some cases that if a borrower has been impacted by the COVID-19 pandemic, the card issuer will refund interest charges, waive or reimburse late fees and reinstate rewards points, if there are any, for the borrower’s current statement. And if the borrower is unable to pay even the minimum amount due, the account will not be marked as past due.
“You’ll likely have to pick up the phone and ask for help, but if you do, the changes can be really impactful,” said CompareCards senior analyst Matt Schulz. “Your mileage may vary, depending on your issuer and your specific circumstance, and these changes don’t last forever. However, for those whose financial lives have been turned upside down by the coronavirus, these changes can make a very difficult time a little less so.”
Schulz also pointed out that most credit card issuers have so-called hardship programs that kick in when disaster strikes. “The coronavirus certainly qualifies,” he said. “These programs have helped people after hurricanes, wildfires, terror attacks and other incidents by providing short-term relief like higher credit limits, waived fees, extended payment deadlines and, yes, reduced APRs (or annual percentage rates).”
“There are a number of options available that can give you some time to get back on track financially, such as allowing you to skip a monthly payment or allowing you to delay payments if you’re out of work,” said Bankrate chief financial analyst Greg McBride. “Just make sure the interest doesn’t continue to accrue during the time you’re not making payments and that they will not report you to the credit bureaus as being delinquent.”
Also keep in mind, a benefit of the Federal Reserve having dramatically cut interest rates in March is that this will filter through to the rate charged on existing credit card balances. “Rates adjust with a lag, however, so it may take two or three statement cycles for the lower rate to show up,” McBride said. “Also, consider shopping around for a zero percent or other low-rate balance-transfer card. This can reduce your required payments, give you a reprieve from interest charges for 15 to 21 months and be a real tailwind in your efforts to pay off debt.”
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Would it be wise to take out a 401(k) loan to pay off bills now in preparation of a possible layoff?
Most financial advisors agree that taking a loan from your 401(k) or workplace retirement plan should be a last resort, even now.
“Most of your bills can wait. Lenders, landlords and utilities may all offer deferment programs to help people deal with the crisis, said financial advisor Ric Edelman, CNBC contributor and founder of Edelman Financial Engines. “If a layoff is likely, start reducing your expenses immediately. The loan option will always be there; no need to do it before necessary, and it should be a last resort.”
However, if you find you desperately need those funds and have no other resources, the stimulus bill working its way through Congress relaxes the rules around retirement-plan loans, allowing you to borrow up to $100,000 from your 401(k). That’s double the amount you can normally take.
This year, you’ll be able to take a coronavirus-related distribution of up to $100,000 from your retirement plan or IRA without the 10% early withdrawal penalty, according to the Senate version of the bill. You’re still on the hook for income taxes on any amounts withdrawn, but the bill right now would give you three years to pay these levies.
Loans from a 401(k) plan follow a different set of rules than withdrawals. You can borrow against your savings tax-free if you meet certain requirements. But it is important to understand the rules of your company’s 401(k) plan rules before deciding to borrow.
“Some employer plans require the participant to pay back the loan before separation. In this case, if the loan is not repaid, the outstanding balance will be deemed a taxable distribution subject to the participant’s ordinary tax rate and an early withdrawal penalty for tax-deferred 401(k)s,” said certified financial planner Lazetta Rainey Braxton, co-CEO of 2050 Wealth Partners and a member of the CNBC Financial Advisors Council. “If the participant is age 59 1/2 or older, they can take a distribution that will be taxable but not subject to the early withdrawal penalty if funds are needed while employed.”
Braxton says if you’re not certain you’ll be laid off but still need money now, be prepared for the tax consequences because the loan could be taxed and you may pay a penalty if a layoff occurs.
My business is closed, and I have rent and bills to pay. I won’t be getting income. How can I get those bills paid or earn money during this crisis?
The latest version of the coronavirus relief bill working its way through Congress would provide $350 billion in small business loans. However, it is uncertain what financial relief the final legislation will bring to small business owners. There are small business loans and resources to handle COVID-19 disruptions and losses. Here are some avenues for you to explore now.
SBA loans. The U.S. Small Business Administration has already increased its funding pool from $20 billion to $50 billion in response to the virus. It is currently offering low-interest disaster loans of up to $2 million for small businesses suffering losses due to the coronavirus. The loans can be used to pay debts and cover payroll and other bills. Go to the SBA website to find out if you’re eligible and apply online.
Private lenders. Some lenders and companies are also offering discounted businesses loans and grants during the coronavirus outbreak. Finder.com has been keeping track of offers from U.S. Bank, Amazon, Facebook and others. Kabbage also has an online hub to help businesses. The Restaurant Workers’ Community Foundation set up a relief fund to help workers and owners. Also, check with your business’ bank about your options.
Mentors and advisors. To earn money while your business is closed, experts recommend approaching your enterprise with a new vision. Seek guidance for free from business counselors at SCORE. This nonprofit is the nation’s largest network of volunteer business experts with more than 10,000 mentors who are available to participate in remote mentoring sessions by phone, email and video.
Also, organizations such as the Financial Planning Association, the country’s largest group of certified financial planners; and nonprofit financial empowerment organization Savvy Ladies are offering free financial guidance.
Braxton offers a few other tips to consider: “See if there are businesses that can be product or service extensions for what you know how to do well. Explore ways to charge for your service online. Negotiate with your vendors payment terms,” she said. “It’s easier for vendors to keep a client than to try to gain a new one.”
Also look for other ways to increase your own income, which may involve temporarily working another job in your current or different industry, said certified financial advisor Stacy Francis of Francis Financial and founder of Savvy Ladies. Amazon, Walmart, CVS and Domino’s are all hiring. “It may not be comfortable; it may be a compromise,” Francis said. “You don’t want to put yourself in a financial hole that’s so deep that you can’t dig out of it.”