The ongoing Coronavirus pandemic has changed life as we knew it. On one hand, COVID-19 raises concerns about future economic uncertainties. On the other, you may have a unique opportunity to pay off debt or better manage your finances on your journey to or debt avalanche approaches.
3. Growing skepticism about the economy: The Consumer Confidence Index, published by The Conference Board, decreased to 84.8 in August, much lower than 130.7 in pre-COVID February. This reflects continued concerns about the economy and individual financial well-being. This could be a good time to revisit your saving plans and secure your finances for the future.
How to plan your debt reduction during COVID-19
If you’re struggling financially because of the Coronavirus pandemic, your first step should be to create — or rework — your budget. Compare your income to your expenses. From there, build a plan for the next month. Figure out which bills you absolutely must pay, and which you can drop. Determine which repayment strategy (debt snowball, debt avalanche, or a hybrid) works best for you.
How to adjust your debt repayment or savings strategy
Depending on your individual situation, you may benefit from modifying your debt repayment and/or savings strategies while dealing with the economic impacts of Coronavirus.
1. If you’ve been paying more than the minimum: You’re already one step ahead of the game, but how can you make your debt repayment even more efficient in a time of financial uncertainty? Consider the debt avalanche method, which prioritizes paying off the debt balance with the highest interest rate first. This can ultimately help you save on interest, putting money back in your pocket for a potential emergency.
2. If you’re a homeowner:This could be a good time to refinance your mortgage. If your credit score has increased recently and your income is stable, you could qualify for the lowest refinance rates. With a mortgage refinance, you could lower your monthly payment as well as see long-term interest savings over the life of the loan. Consider using what you save from a refinance to pay down other debts or build an emergency fund.
Refinance rates constantly change, but amid the pandemic, rates have hovered near and even dipped below 3%, a historic low. But keep in mind, you could be hit with a 0.5% adverse market fee beginning December 1.
3. If you’ve only been making minimum payments:If your employment status is stable enough to continue making at least the minimum monthly payments on your debt, consider revisiting your budget. Look for ways to cut out unnecessary spending in addition to what you may already be saving amid shutdowns, and put more toward debt repayment.
4. If you’re concerned about losing your job:Continue to make minimum payments on your debts, but put as much as possible toward building a stable emergency fund after you’ve covered basic expenses. Instead of tackling your debt, save any extra money for an emergency, like potentially losing your job.
5. If you’ve lost your job:Losing a job can be devastating for many reasons, but the financial burden can often be the hardest to bear. If you didn’t receive severance, file for unemployment as soon as possible.
To streamline your debt repayment efforts, you could also consider debt consolidation.
As another option, you could see if there are ways your creditor or lender can help. Many credit card issuers have implemented COVID-19 debt relief programs, and you may be able to negotiate with your creditor directly to defer payments or waive interest fees for a month. The government also has COVID-19 resources from the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, and more.