How to Pay Down Debt When Your Income Changes

A curveball, like losing your job in the middle of a pandemic when you have a heap of debt to pay off, can seem like an insult to injury that causes severe stress. In fact, in a survey conducted by the American Psychological Association earlier this year, 72 percent of respondents reported feeling stressed about money at least some time in the prior month, regardless of job status. "Financial distress—especially due to debt—can seriously impact how confident people feel about their financial well-being, but it doesn't have to," says Colleen McCreary, chief people officer at Credit Karma.

If you find yourself in this unfortunate situation, experts explain how to pay down your debts (without feeling like you're drowning) so that it doesn't spiral out of control.

Don't put your debt aside.

"It's easy to bury your head in the sand when the thought of tackling your finances seems overwhelming or unattainable, but the worst thing you can do when you're in debt is nothing," says McCreary. The sooner you take action, no matter how small that action may seem, the sooner you kickstart your path to becoming debt-free, even if you're not bringing in any income at the moment.

Readjust your plan.

Instead of abandoning your plan of action, focus on reevaluating it. While you may have ironed out a roadmap to pay down your debts before your change in job status, those milestones may not be attainable with less liquid cash coming in. "If you had a budget before, you're going to need to tighten that up even more," says McCreary. "If you had a repayment plan, that may change."

Cover the basics first.

A budget is more important now than ever, says McCreary. "A budget will not only help you visualize how best to spend the money you have, but it can also help you track future spending, so you don't go off course. If you're not keeping close track of your income and spending, you may wind up in debt all over again."

Especially when your income is limited, it's vital to cover the basics first, she explains. Start with things like your home payment, food, and utilities. From there, you can find areas to temporarily cut down on, especially the "nice-to-haves," until you are out of debt.

Pay minimums on time.

If you're able, it's important to pay the minimum balance on your credit cards each month; what's more, make sure you do so on time, says Kathy Entwistle, managing director, private wealth advisor for Morgan Stanley. If you neglect payments, it can negatively impact your credit score. "Your credit score has real-life ramifications—it is your financial DNA and could impact your interest rates on loans (including mortgages), limits on credit cards or loan amounts, access to credit card rewards and interest rates, car insurance premiums, ability to rent or own a home, and need for security deposit on utilities," she explains. Plus, deferring payments can cause you to incur fees that can cause your debt to snowball. If possible, pay down the cards with the highest interest rates first, she adds.

Tap into your emergency fund.

This type of situation is the prime reason you should have an established emergency fund—three to six months of liquid cash to cover expenses any surprises life throws your way, says Entwistle. If you need extra funds to help pay down your debts, now's the time to tap into that fund. Just be sure to replace that money once you're able to, so you'll be covered in the future, too.

Avoid drastic measures.

If you don't audit your spending, you might find yourself in a place where you're putting out more than you're bringing in. If you find yourself in this position, try to avoid any drastic measures like taking out a payday loan, says McCreary. "Payday lenders tend to prey on those in desperate circumstances like these, and these loans can be the beginning of a long cycle of debt," she explains. "A payday loan may carry unfavorable terms, including high fees and interest rates, so before you borrow money, take a hard look at the fine print."

Instead, do some research into other options available to you—like getting a private loan from a friend or family member or transferring your debt to a lower interest card. (Just be aware of any transfer fees.)