How to Deal With Credit Card Debt on a Fixed Income

Living on a fixed income is hard for anyone, but for senior citizens, it’s especially challenging. Rising health care costs, insufficient retirement benefits, and longer life expectancies make a fixed income even more difficult. With limited dollars stretched in too many directions, many retirees have turned to credit cards to cover the shortfall. As a result, an increasing number of seniors find themselves having to repay large balances while still needing to cover necessary living expenses. However, if this sounds like you, don’t worry. You can take steps to relieve the pressure.

Take Swift Action

If you are just now finding that your income is insufficient to pay what you owe, do try to deal with the problem immediately. Communicating with creditors is almost always better and easier with a positive credit history and payment record behind you. If you wait until you miss payments, the debt goes into collections, or you are in the process of being sued, your options for improving the situation decrease.

In the meantime, if you know you can’t repay what you buy on credit, try to stop charging until you can. As much as you may need the supplemental income, credit cards are really short-term loans, and if you get in over your head, high interest rates and other fees can make them extremely expensive and difficult to repay—and make the problem worse in the long run.

Consider Your Whole Financial Picture

It is not uncommon for people with financial problems to overlook some possible ways to increase cash flow. So you know exactly what you have to work with, analyze your complete financial situation—you may have more to offer than you think. Your potential options may include:

Permanent life insurance policy– If you have a permanent life insurance policy in which you’ve accumulated a substantial cash value, you may consider taking a cash-surrender loan to repay all or part of your debt. You can take out up to 96 percent of the investment portion while leaving the death benefit intact. The loan does not need to be repaid; the insurance company will recoup the balance (plus interest) after you die.
Savings and assets– Having enough money set aside for future expenses and emergencies is very important. However, if you have more than that tucked away and are holding onto high interest debt, you may consider using some of the savings to erode the balance. You may also consider selling unnecessary property, too.
Employment– For some, going back to work is a reasonable and even attractive possibility to relieve a financial burden. If it is, your income may not be so fixed after all. However, if you are not able to work, do not unduly push yourself (or allow others to push you, either). Your health and wellbeing, particularly at this stage of your life, is too important to jeopardize.
Home equity/reverse mortgage– Many seniors are homeowners and have built up substantial equity in their homes. Use it to your advantage. Possibilities include selling the home and moving into a less expensive place, taking out a home equity line of credit or second mortgage, or obtaining a reverse mortgage (a loan against your home that you do not have to repay as long as you live there). Each of these options must be very cautiously considered, and entered into only after you know all of their positive and negative aspects.

Be aware that if your expenses continue to exceed your income, your problems won’t go away – they will just be delayed. The last thing you want to do is use up all of your resources, only to accumulate debt again. Be especially careful when tapping home equity. If you are unable to make the payments, you could lose your home to foreclosure.

Develop a workable spending plan

Before contacting your creditors, gain a complete understanding of your finances so you know how much you have to offer. Develop a spending plan. List how much is coming in every month, and what all of your expenses are. It is exceptionally important to be realistic and conservative with your figures.

Subtract the total of your expenses from your income. The sum you have left over (plus anything you can get from other sources, such as home equity or selling assets) is the amount you can spread out among creditors. If you are in the red or there is very little to offer, you could try going back to your spending plan and reduce certain expenses to make up for it, at least temporarily. But if your spending plan is already pared down to essentials, avoid taking it down further. On paper you may be able to trim the amount you spend on groceries, but in reality it may be neither healthy nor doable.

Contact Your Creditors

Once you have a very good idea of how much money you have to offer, it’s time to contact your creditors:

Write down a summary of your situation: how you got into debt, your inability to meet the payment, and how much you can offer for how long. Be specific and keep to the point. Notes are always helpful so you don’t get flustered or forget to mention key information.
Call each of your creditors and ask to speak to a manager or supervisor. Using your notes, explain your circumstances and proposed plan.
Be firm. If the minimum payment is $150, and all you have is $50 don’t promise more than you are reasonably able to give. If you can’t meet the payment, your credibility will be harmed, making future negotiation more difficult.
Keep a record of the person you spoke with, what was said, and the date and time of the call.
Back up your conversation with a letter or email. Write to each creditor, again outlining your circumstances and proposal. Include supportive documentation and if you have agreed upon a payment arrangement, a check (never send post-dated checks). Make and keep copies of everything. Mail letters from the post office so you can send it certified mail, return receipt requested.

Do not take it personally if you receive letters and phone calls that aren’t exactly polite. It’s not against you; the creditors do not know you as an individual. They just want the money and speaking in a gruff way sometimes gets the job done. Try to not be intimidated or scared. That said, creditors should not get out of line. If so, report them to the Better Business Bureau and your state’s Attorney General, who will investigate the matter.

Owing money is never a good feeling – but when repaying it is difficult or impossible due to income limitations and high expenses, the pressure can be terrible. If you are a senior citizen living with this kind of stress, make sure you take action by exploring all of your options and offering what you can. This way you can take pride in knowing that you are doing your very best.

To help you develop a spending plan, Hanscom Federal Credit Union offers a free Money Management Planner. This 12-page guide includes worksheets, tips, and strategies for creating a healthy budget.