Disaster Recovery Strategy

[lexrjSD]

Being part of the IT industry I've learned to always be prepared for the worst. That's why responsible IT professionals always have disaster recovery plans in place, when things go south everybody knows what to do in order to recover in the least amount of time possible. Based on that, I'm trying to come up with a disaster recovery plan for my credit in case something happens. I would love to hear your ideas and critique.

Assumptions: Your CR is spotless and your utilization is under 15%. If that's not happening right now, you're most likely already in a disaster scenario, so this plan probably won't work for you.

Scenario: You've been hit with either a very large expense or your income has been drastically reduced for an extended period of time.

Strategy: immediately acquire the longest  0% APR offer, transfer all your balances (if any) and charge all your expenses on it. Start paying it down as soon as you can.

Procedures:

1) Search and apply for the longest 0% intro offer CC you can find. When searching, consider lenders that you either already have the least amount of credit with them, or the one with the highest so you can re-arrange your limits to a 0% intro offer. When applying, make sure to recon in order to get the highest credit line possible, try to get at least a match of your current highest CL.

2) Transfer all your balances to the new credit line and charge all your future expenses on it. It's important that you zero your balance of all your other credit lines in case you can't make a payment on your new credit line. You wan't to try to burn the least number of lenders. You're trying to minimize the damages, so even if the other lenders start CLDing or closing your accounts at least you will be in good terms with them for the future when you recover.

3) Tight your budget, reevaluate your spending and only spend the absolute necessary until your plan is completed.

4) Make at least the minimum payments and start paying it down as soon as you can.

Since I've been fortunate enough to never be on this type of situation, my experience is only based on what I've read, so there are some questions I have:

1) What's the usual behavior for lenders that are NOT being affected by high utilization on their credit lines and/or late payments? CLDs and account closing?

2) Is there are a lender that is more flexible on extending due dates and/or working with you? Discovery maybe?

3) What's the best pay down strategy when being hit with APR? 

4) Is there a better way to get a higher and longer 0% intro credit line that you can BT? Personal loans or home equity line (assuming you have equity) maybe?

For now that's the best I was able to come up with, will be happy to hear you inputs.

[SnackTrader]

This is a great preparation exercise. Some thoughts:

#3 is the most important. It's really hard to cut cable TV, eat differently, and just in general stop living the lifestyle to which you are accustomed. But, the sooner this happens, the longer you can be comfortable in this type of scenario. 

Also, the second most important step is prior to the disaster event.  Savings are a persons best buffer from needing to use credit. Mortgage/Rent, car payments, utility bills, and other necessary payments are often not eligible for CC payments. Therefore, you need 6 months worth of cash available for those expenses. Only then will a 0% card really help you.

Finally, your scenario makes the assumption that you can recognize the prolonged nature of the event early on. If only it was that easy. I think it is very hard to admit that a) a large bill won't be paid down in a reasonable time, or b) that unemployment will last for many months. But, eventually that type of thing happens to many people. If I was to realize it the day after the event occurs, I think I would get a 12 month or longer 0% card on day 1, and then depending on how high my balance gets, get a second BEFORE that card reports its second or third statement. That would give me almost 2 or 3 months extra on the second card, and wouldn't be outside the realm of possibility for approval chances. Just an addition to your thought process. 

 

[user5387]

You may not wish to mix BTs and purchases on the same card.  This can lead to confusion, for example with regard to the grace period.

More generally, I think you would want to give CU cards a central place in such a strategy.  Many of them have low APRs,  and are free of fees for BTs and cash advances.  For example, my PSECU Visa has no fees in this area, and has a 2.9 BT rate, along with a 9.9 purchase and cash advance rate.  CUs also offer generous CLs, for example $15K for my PSECU Visa.

An intrinsic problem with 0% BT offers is that they may be hard to get when you need them most (an emergency), and you may end up with a CL that is way too low to cover the bases.  They may also have a fee like 3% for BTs, and/or the usual whopping 5%/25% fee/APR for cash advances.

Another comment here is that you might wish to have an LOC lined up in advance, since it's often the most "graceful" way of handling an emergency, and is typically free of fees, and only charges interest when you need it.

[hilarybanks]

Based on personal experience, I would encourage people not to take on any new debt while going through a financial disaster. It will only make things worse. It is extremely difficult to make even minimum payments when you are unemployed or otherwise unable to generate income. If you already have balances, I think it is a good idea to transfer them to a 0% interest card and try your best to pay all accounts on time, but your rent, utilities, food, and gas come first. The best barrier against a credit emergency is savings. Cut out all unnecessary spending, and live on a strict budget.

To answer one of your questions (#2), when I was going through financial difficulties, the only credit card company that worked with me was Chase. I had a Southwest Airlines Visa at the time. They put me on a program, dropped my interest rate, removed some of my late payments, and closed the card in exchange for structured payments. Bank of America said they wouldn't help me until I was in default for several months and Citi Bank would not work with me at all and that account ended up being charged off (even though the company was going through bankruptcy/restructuring, they didn't care about me as a consumer). I will never, ever, get another credit card with Citi Bank. 

I now keep an emergency fund and I only carry a balance on one card. (Slate - 0% interest for 15 months, and it will be paid off.)

[lexrjSD]

---

@SnackTrader wrote:

This is a great preparation exercise. Some thoughts:

#3 is the most important. It's really hard to cut cable TV, eat differently, and just in general stop living the lifestyle to which you are accustomed. But, the sooner this happens, the longer you can be comfortable in this type of scenario. 

Also, the second most important step is prior to the disaster event.  Savings are a persons best buffer from needing to use credit. Mortgage/Rent, car payments, utility bills, and other necessary payments are often not eligible for CC payments. Therefore, you need 6 months worth of cash available for those expenses. Only then will a 0% card really help you.

Finally, your scenario makes the assumption that you can recognize the prolonged nature of the event early on. If only it was that easy. I think it is very hard to admit that a) a large bill won't be paid down in a reasonable time, or b) that unemployment will last for many months. But, eventually that type of thing happens to many people. If I was to realize it the day after the event occurs, I think I would get a 12 month or longer 0% card on day 1, and then depending on how high my balance gets, get a second BEFORE that card reports its second or third statement. That would give me almost 2 or 3 months extra on the second card, and wouldn't be outside the realm of possibility for approval chances. Just an addition to your thought process. 

 

---

I agree, savings is essential, but this strategy assumes you either already blew your savings or don't have one.

Regardless of the event, I don't see why it's not easy to know when you're a going to run out money and apply the strategy before its' too late.

I agree, getting a 2nd line of credit it's definitely a good strategy.

[lexrjSD]

---

@hilarybanks wrote:

Based on personal experience, I would encourage people not to take on any new debt while going through a financial disaster. It will only make things worse. It is extremely difficult to make even minimum payments when you are unemployed or otherwise unable to generate income. If you already have balances, I think it is a good idea to transfer them to a 0% interest card and try your best to pay all accounts on time, but your rent, utilities, food, and gas come first. The best barrier against a credit emergency is savings. Cut out all unnecessary spending, and live on a strict budget.

To answer one of your questions (#2), when I was going through financial difficulties, the only credit card company that worked with me was Chase. I had a Southwest Airlines Visa at the time. They put me on a program, dropped my interest rate, removed some of my late payments, and closed the card in exchange for structured payments. Bank of America said they wouldn't help me until I was in default for several months and Citi Bank would not work with me at all and that account ended up being charged off (even though the company was going through bankruptcy/restructuring, they didn't care about me as a consumer). I will never, ever, get another credit card with Citi Bank. 

I now keep an emergency fund and I only carry a balance on one card. (Slate - 0% interest for 15 months, and it will be paid off.)

---

As the title says, its meant for a Disaster situation, this is the worst case scenario and you don't have another option.

This strategy assumes you're not carrying any balances that you're not able to PIF, if you're currently carrying a balance that you cannot PIF, in my opinion you are already on a path for financial disaster.

[Anonymous]

---

@lexrjSD wrote: 

---

I agree, savings is essential, but this strategy assumes you either already blew your savings or don't have one.

Regardless of the event, I don't see why it's not easy to know when you're a going to run out money and apply the strategy before its' too late.

I agree, getting a 2nd line of credit it's definitely a good strategy.

---

Because of natural denial!   I've lost my job, and I can see that I have X month's assets left, but hey, I am a highly trained professional, and I KNOW I will able to get a job really soon now.  Yeah, I've read in my field that many people are out of work 3X months, and then get a job that pays only 50% of their former salary, but that's them, not me!   And while I might cut down on expenses, I really don't want to stop eating out, because that would indicate failure and ....

But I do think the biggest flaw is the ability to get a 0% card, as others have pointed out.  It depends on the event, but after any longish period of unemployment, you are not going to get a high CL and 0% card.  And reconning probably won't help as the major issue will be your income.   Hence the advice to do it day 1, which is hard because of the denial...

[user5387]

---

@lexrjSD wrote:

---

@SnackTrader wrote:

This is a great preparation exercise. Some thoughts:

#3 is the most important. It's really hard to cut cable TV, eat differently, and just in general stop living the lifestyle to which you are accustomed. But, the sooner this happens, the longer you can be comfortable in this type of scenario. 

Also, the second most important step is prior to the disaster event.  Savings are a persons best buffer from needing to use credit. Mortgage/Rent, car payments, utility bills, and other necessary payments are often not eligible for CC payments. Therefore, you need 6 months worth of cash available for those expenses. Only then will a 0% card really help you.

Finally, your scenario makes the assumption that you can recognize the prolonged nature of the event early on. If only it was that easy. I think it is very hard to admit that a) a large bill won't be paid down in a reasonable time, or b) that unemployment will last for many months. But, eventually that type of thing happens to many people. If I was to realize it the day after the event occurs, I think I would get a 12 month or longer 0% card on day 1, and then depending on how high my balance gets, get a second BEFORE that card reports its second or third statement. That would give me almost 2 or 3 months extra on the second card, and wouldn't be outside the realm of possibility for approval chances. Just an addition to your thought process. 

 

---

I agree, savings is essential, but this strategy assumes you either already blew your savings or don't have one.

Regardless of the event, I don't see why it's not easy to know when you're a going to run out money and apply the strategy before its' too late.

I agree, getting a 2nd line of credit it's definitely a good strategy.

---

I am self-employed, with variable income, and as one's reserves like savings decline, it't easy to fall into the trap of assuming that the big breakthrough is just around the corner.

In my case, I use both savings and CU cards to smooth out the swings, and am currently looking at getting another CU card for this purpose.

[lexrjSD]

---

@Anonymous wrote:

---

@lexrjSD wrote: 

---

I agree, savings is essential, but this strategy assumes you either already blew your savings or don't have one.

Regardless of the event, I don't see why it's not easy to know when you're a going to run out money and apply the strategy before its' too late.

I agree, getting a 2nd line of credit it's definitely a good strategy.

---

Because of natural denial!   I've lost my job, and I can see that I have X month's assets left, but hey, I am a highly trained professional, and I KNOW I will able to get a job really soon now.  Yeah, I've read in my field that many people are out of work 3X months, and then get a job that pays only 50% of their former salary, but that's them, not me!   And while I might cut down on expenses, I really don't want to stop eating out, because that would indicate failure and ....

But I do think the biggest flaw is the ability to get a 0% card, as others have pointed out.  It depends on the event, but after any longish period of unemployment, you are not going to get a high CL and 0% card.  And reconning probably won't help as the major issue will be your income.   Hence the advice to do it day 1, which is hard because of the denial...

---

Good point and good advice.