5 Stressful Financial Situations & How to Handle Them
Between recessions, unexpected expenses, and the ins-and-outs of daily life, money can sometimes feel precarious. Here are a few situations that might derail your finances, as well as what you can do about them.
Scary Situation #1: Costly Surprise Expenses
An unforeseen event (e.g. a car breakdown, a vet visit, a broken appliance) can lead to expensive purchases you weren't planning to make. In a perfect world everyone would have the money they need to pay for these costs upfront, but as of May 2022, nearly half of Americans reported they wouldn’t be able to cover an unexpected $400 expense in cash.1 But you still have options even if you don’t have the cash to pay for the things you need.
What to Do
- Keep your emotions in check. It’s hard to think clearly when you’re stressed, so you may not make the best decisions if you react right away. Make sure you’re in the right headspace before you proceed. If you feel overwhelmed by anxiety, try a time-tested method for relaxation such as breathing deeply and meditating, talking to someone you trust, and/or going for a brief and brisk jog.2
- Ask about payment plans. Some companies offer “installment plans” that let you break a large cost into smaller weekly, biweekly, or monthly payments (i.e. “installments”) with a low interest rate. This is especially common among medical providers, so if you’ve been slammed with a pricey healthcare or vet bill, don’t be shy about asking for an installment plan.3
- Evaluate credit alternatives. If you can’t pay in cash and an installment plan isn’t an option, look into payment alternatives like a personal loan, line of credit, or emergencies-only credit card. These can help you get what you need right away, then pay for it over time.
- Commit to building an emergency fund. An emergency fund is your best bet in handling future financial emergencies. Try to save at least a little bit each month so you can pay for future unexpected expenses in cash. If you need to revise your budget to prioritize saving more, check out our guide to effective budgeting!
Scary Situation #2: A Sudden Drop In Your Credit Score
Your credit score plays a major role in your financial life and can determine many things, including whether you’re approved for new credit and the borrowing terms you receive if approved. That’s why it’s so important to continually monitor your credit score, and why it can be stressful if your credit score suddenly plunges. Your credit score can drop for many reasons, and not all of them are related to your behavior.
What to Do
- Obtain a copy of your credit report and inspect it closely. Your credit report breaks down your score and tells you what’s influencing it. You’re entitled to one free copy per year from each of the three main credit bureaus (Equifax, Experian, and TransUnion), so obtain a copy from one of them and examine it for any changes that might’ve impacted your score. Pay specific attention to anything related to the major factors that affect your score, such as late or skipped payments, excessive credit utilization, or any new credit applications. This will tell you what you need to do and which habits you should change or develop to bring your credit score up.
- Identify any errors on your credit report. A 2021 study from Consumer Reports found that more than one-third of Americans have at least one error on their credit reports.4 Common credit report errors that can unjustly influence your score include inaccurately listed credit applications or card balances and/or incorrect information about your payment history.
- Resolve any errors you find and get them removed from your credit report. To do this, you’ll need to notify the agency (or agencies) that issued the erroneous report. Mail them a letter that explains the error in detail, offers any evidence you can to support your claims, and provides your contact information, particularly your address and phone number.5
- Continue monitoring your score over time. A close eye on your credit score will show you whether your efforts to resolve the drop are working. Our Credit Health monitoring tool makes it easy to follow your score and assess your progress!
Scary Situation #3: Being Declined For Credit
Approximately 33% of working Americans were denied for credit at least once last year, and that number could grow in our post-COVID, recession-prone world where lenders tighten their approval requirements and become more strict about who they approve, as well as how much they offer.6 Although application denials have historically been more common among millennials and lower-income earners, a person from any age or socio-economic group may find themselves unable to get the credit they need one day.7
What to Do
- Figure out why your application was denied. You’ll receive an “adverse action letter” within 30 days of your application being denied, which will detail the reason(s) for the rejection.8 Common reasons for application denial include a limited credit history, a tendency of making late payments, and submitting too many applications in too short a time. The reason(s) listed will tell you what you need to work on to improve your chances of getting approved next time.
- Take concrete steps to build (or rebuild) your credit. If you were turned down because of a limited credit history, you’re somewhat restricted in what you can do. Your best bet is to wait patiently and develop good habits (e.g. making payments on time, maintaining a low credit utilization ratio, continually monitoring your score) with the credit you already have. If you’re truly brand-new to credit and don’t have anything to build a history with, wait a few months and then apply for a low-limit credit builder card. Use it wisely to build a credit history that encourages future lenders to approve your application. If, on the other hand, you were denied because of recent credit missteps (e.g. making late payments, high credit utilization, filing for bankruptcy), your approach should be more methodical and focused on remedying those mistakes and/or showing that you won’t make them again.
- Keep non-credit-related factors in mind. Your credit score is a major factor in your approval odds when applying for credit, but it’s not the only thing lenders consider. They may also inspect your employment history, debt-to-income ratio, and/or what savings accounts you have and how much money is in them. If you have a spotty employment history, a high (i.e. above 40%) debt-to-income ratio, and/or a scanty savings account, remedy those things before applying for credit again.
- Give it time before you submit a new application. A “hard inquiry” appears on your credit report each time you apply for credit. This inquiry can temporarily ding your credit score by up to five points and stay on your report long after your score recovers; in fact, a hard inquiry can remain on your credit report for up to two years. With this in mind, wait at least six months before applying for credit again.
Scary Situation #4: Identity Theft
The U.S. Department of Justice defines identity theft as “[a] crime in which someone wrongfully obtains and uses another person's personal data in some way that involves fraud or deception.”9 It’s extremely common, affecting nearly 1.7 million people in 2021 alone.10 Identity theft can take many forms, including “financial” theft wherein perpetrators may make purchases, transfer money to themselves, forge checks, or open new credit cards in another person’s name, among other things.
Being targeted for identity theft is stressful and unsettling, but you can mitigate the damage if you act swiftly!
What to Do
- Call your bank and credit card issuer(s). Report the theft, provide any evidence you can to support your claims, and follow the proper procedures for getting any stolen money refunded. Ask them to shut off your credit cards and send you new ones with brand-new numbers. After hanging up, you may want to reinforce the conversation by mailing them a letter reiterating everything you discussed and outlining the steps you expect them to take.
- Notify the authorities. In addition to contacting your financial institution(s), you should report the theft to the Federal Trade Commission (FTC.) You can do this online at identitytheft.gov or by phone at 1-877-438-4338. Depending on the details of the crime, the FTC may recommend reporting it to the police as well.11
- Alert the three main credit bureaus. TransUnion, Equifax, and Experian each have their own systems for reporting identity theft. They'll place a “fraud alert” on your report that prevents new accounts from being opened in your name for 90 days.
- Protect yourself against future attacks. Unfortunately, identity theft will continue to happen as long as it’s profitable for the people who do it. But that doesn’t mean you’re helpless! Change your passwords for all online accounts that might have or provide information about your bank accounts. Then, continue guarding your accounts with a few simple behaviors such as setting up multi-factor authentication, deleting all stored credit card information, and continually monitoring your credit for any sudden changes or suspicious activity.
Scary Situation #5: Losing Your Job
Losing your job can be devastating, not just financially but emotionally as well. If it happens to you, the first thing you should know is that you are not alone and your situation isn’t a reflection of your talents or value as an employee. According to recent statistics from The Balance, there are nearly 6 million unemployed people in the United States, and that number may grow if the U.S. is hit by a deep recession or another sudden blow like the COVID-19 pandemic.12
But knowing that others are in the same boat as you may not be enough to quell your sadness or ease your stress. Give yourself some time to mourn your loss, then leap into action.
What to Do
- Find out what resources are available. Many companies offer a “severance package” to employees who have been laid off. While they won’t last forever, the benefits of a severance package can relieve some of the stress and financial strain of an unexpected job loss. The standard package contains severance pay (a lump sum equivalent to a certain number of weeks or months worked), extended insurance coverage, and job placement services to help you find your next opportunity.13 You should also apply for unemployment insurance ASAP, since new unemployment applications can take a while to go through the system. The application process differs by state, so check with the U.S. Department of Labor to learn how you can apply for unemployment insurance in your state.
- Revise your budget. You’ll be living on a reduced income until you find a new job, which means your spending habits will need to change (at least temporarily). Take a look at your recent expenses to see where you can cut costs. Your bank account will thank you for your efforts!
- Hit the job market hard. There’s no better time than now to brush up your resume! Include concrete details about your accomplishments, employment and volunteer experience, awards and accolades, and any unique skills that set you apart from other candidates.14 If you haven’t already, set up profiles on career sites like LinkedIn, Glassdoor, and Indeed and post your resume for all to see. Don’t be ashamed to let your network know what’s going on - they’ve likely been in your situation before, and they may have the connections you need to secure your next job.
- Take care of your physical, mental, and emotional needs. The effects of unemployment can reach beyond your bank account. People experiencing unemployment may stop exercising, have disrupted sleep and/or eating routines, isolate themselves from loved ones, and/or feel severe negative emotions such as frustration, anxiety, and hopelessness, among other things.15 So as you navigate unemployment, remember to care for yourself and give yourself the kindness, compassion, and grace you’d show someone else if they were in your situation. Trust that happier, more prosperous times await.