Borrowing money

How to protect your credit during a recession

There’s a good reason the possibility of a recession sends shivers down the spines of personal finance experts. A decline in economic activity over several economic cycles can wreak havoc on the lives of millions of people. Employers in financial difficulty may decide to lay off large numbers of workers. The stock market can plunge, leading to devaluation of investments just when investors need money to live on when they retire. According to a July 2022 Bankrate poll, 52% of economists believe a recession will begin within the next 12 to 18 months.

Keeping your credit in good shape will help prepare you for the problems associated with a recession. Here are some strategies you can use before and during an economic downturn.

Know your current credit scores

High credit scores will keep low-cost financial opportunities open, which will be important if you want to borrow money during a recession.

Check your credit scores now to see what they are. The FICO score is the most commonly used, and it has a scale ranging from 300 to 850, with higher numbers indicating less credit risk. Good scores start at 670, but the closer you can get them to the top – and then keep them there – the better.

“Credit is king,” says Ramona Ortega, CEO of My Money My Future. “We use it to mine and create assets. If your scores are low, you will pay more because the interest rate will be higher. Entering a recession with high scores will give you more access to cheaper capital when you need it. This can be a credit card, loan or mortgage refinance.

Revise your budget

Now is the time to review all your expenses and then cut costs where you can. According to Ortega, many people spend on things they don’t care about and can easily eliminate. To protect your credit against a recession, you’ll want to free up cash for increased debt repayment and bigger savings.

“If you’ve been spending like you don’t have a budget, stop and create one,” says Ortega. “You need to know your numbers. Look at your expenses in detail to see if you’re going over what your net income allows.

Your credit card statements are a great place to start. You can use your card statements as a budgeting tool. Identify expenses you can give up, such as a gym membership you never seem to use, streaming services you don’t need, and excessive dining out.

Once done, take the necessary steps to reduce expenses and add that money to savings or to speed up debt elimination.

Secure your job

For consumers, one of the most frightening by-products of a recession is the possibility of mass layoffs. July 28, 2022, Forbes Advisor-Ipsos Bi-weekly consumer confidence monitoring found that more than 40% of respondents think they or someone they know is at risk of losing their job in the next six months.

Without a regular income, it can be extremely difficult to meet your expenses and financial obligations, especially if you don’t have enough savings to fall back on. This can put your credit at risk. You may miss payments or start relying on credit products to fill the gap and then incur significant debt.

For now, however, the news is favorable. The Bureau of Labor Statistics August 2022 employment report announced that the United States is still experiencing a labor shortage and that there are currently 11.24 million positions available. So if you’re not getting paid what you think you’re worth, now might be a great time to look for a new position.

“There are jobs out there, if you’re looking for a better one,” Ortega says. “But if you want to stay with your current company, be that invaluable employee. Talk to your boss and explain why you want to stay and how you want to grow. Ask how you can get there.

Create an emergency fund

There’s no better time than now to start or build an emergency fund. According to Shindy Chen, author of The Credit Cleanup Book and Credit Score Hacks, rising interest rates that work against debtors work in favor of savers. Interest rates are rising on money market and interest-bearing savings accounts, as well as on your credit cards. It’s a good idea to add aggressively to a savings account that you can draw on in an emergency, because you can actually see a return on money from deposit accounts.

“Try to accumulate four to six months of living expenses in case something goes wrong and you lose a primary source of income,” says Chen. “There’s nothing like financial peace of mind. Knowing that you have a little cushion can help you overcome any short-term uncertainty or financial anxiety. »

The money you put aside in a deposit account can prevent you from falling behind on your payments or borrowing too much, factors that would negatively impact your credit rating. Simply withdraw what you need and replace the funds as soon as possible.

Reduce consumer debt

One of the most powerful steps you can take to protect your credit against recession is to reduce consumer debt. High credit card balances lead to large monthly payments and high interest charges. It’s the last thing you want in a recession because it makes your personal financial situation unstable. Most credit cards have variable interest rates, which can increase during a recession. If this happens, the debt you are carrying will become even more expensive than it is now.

In addition to increasing your payments with fine-tuned budgeting, you can also consider selling unnecessary assets and sending the proceeds to creditors with the highest interest rates. Or supplement your income with a second part-time job or on-demand job you do on the side, adding that income to the amount you send to your creditors. The less you owe, the better.

Consolidate credit into lower rate products

For consumer debt that you cannot eliminate, consider consolidation. If you can move the balance to products that offer a lower rate — or if you can make a deal where you pay no interest for a set period of time — you can save a lot of money. If your credit scores are high now, don’t delay. “When you have good credit, you have a lot more options to consolidate,” Ortega says.

Balance transfer credit cards can be particularly advantageous. For maximum protection against an uncertain economy, try to find a good balance transfer card with a particularly long 0% APR introductory offer. For example, the U.S. Bank Visa® Platinum card gives 20 billing cycles with no finance charges added to transferred balances, with a 3% transfer fee.

Imagine you have credit card debt of $10,000, with an APR of 23%. If you were to send a fixed payment of $650, it would take 19 months and cost over $1,963 in interest to repay. But switch to a card with 0% APR (plus a 3% fee) and you send equal payments of $543, you’d be debt-free in the same amount of time with no added interest. The monthly payment would be $197 less and you could add it to your emergency savings account!

Another option is a consolidation loan, where you can combine multiple unsecured debts at a lower average fixed interest rate. These loans typically have terms between one and 10 years, so if you can’t afford to pay off your debt within the credit card balance transfer window, it’s worth checking out.

Be aware that consolidating debt with a new credit product may cause an initial drop in your credit score, but it may improve your credit in the long run since you’ll pay off your outstanding debts faster.

Maintain or increase your credit scores

There are a few key rules for maintaining and establishing high credit scores, Chen says. The most important thing is to pay the accounts that appear on your credit report by the due date, no matter what.

Use your credit cards for transactions, but pay the bill in full or keep the balance below 15-25% of your credit limit. This is a conservative ratio compared to the standard advice of having at least 70% of the limit available, but during a recession it makes sense. You are guaranteed to pay less for the debt you defer.

Combined, these two factors — payment history and credit usage — make up 65% of your FICO score, so if you play by the rules, you’ll come out on top.

Maintain good credit habits in any economy

The strategies you employ to protect your credit against a recession will help you in any economy. The recession may not happen, but you have no control over it if it does. What you can control is how you earn, save, spend and borrow. Make the best financial decisions you can, now and in the unpredictable future.