For a good reason, the prospect of a recession causes even the most seasoned financial advisors to shudder. Multiple business cycles of declining economic activity can devastate millions of individuals. Employers may lay off huge numbers of staff if they are experiencing financial difficulties. When retirees need the money they've saved for their golden years, a drop in the stock market can devastate their savings.
Maintaining good credit will put you in a better position to weather the storms of a downturn. Listed below are tactics to keep in mind when the economy inevitably hits a rough patch.
In what ways will the current economic decline impact my credit?
Your credit score won't necessarily take a hit if a recession hits. However, many things can happen during a recession that can influence your money and, by extension, your credit scores.
Businesses often downsize and lay off people during recessions because consumers cut back on spending. When your income drops, whether you're a business owner or a worker who's been laid off, it can be difficult to keep up with your payments and manage your debts. That can affect your credit score.
You should expect a negative impact on your credit score if you are 30 days or later with any of your bill payments. The more time passes without payment, the more severe the impact on your credit rating. You may see negative information about past due payments and collections on your credit report for up to seven years.
A credit card loan may be the only way to get you through a recession's tough months. But your credit ratings may take a hit if you take on too much debt, and it gets out of hand. In addition, having a high credit card utilization percentage can hurt your score.
How to prepare your credit for a recession?
Keep up with your monthly payments.
In order to maintain a good credit score, it is crucial to have a good payment history; thus, paying your bills on time is the single most critical thing you can do. If you have a good payment history because you always pay your bills on time, you will have a good financial future.
Nonetheless, even one missed payment can have a serious effect on your credit score. Make it a priority to catch up on any overdue payments right away. Your credit will take a bigger hit if you let your invoices pile up for a longer period of time.
Make use of a method to maintain tabs on your bill payments if you have problems keeping track of them on your own. Set up a calendar alert or online bill pay to make sure you never miss a payment.
Build a Financial Plan
Creating a budget, if you don't already have one, will assist you in staying organized and allocating your financial resources to the most important needs. Either download a budgeting program or whip together a quick Excel spreadsheet to get things rolling. Then, enter your regular monthly income and expenses to get a feel for your cash flow.
If your current financial situation changes for whatever reason, such as a downturn in the economy, a budget will come in handy. Having a budget in place can make it simpler to make last-minute changes to expenditures and reallocate monies.
Get out of debt
Preparing for a downturn by paying off debt now can ease financial strain later. If you find yourself in a financial bind, you may be able to lower your monthly bills, free up more money in your budget, or boost your borrowing capacity. Maintaining such a pattern can save you from falling into the trap of carrying excessive debt.
You can lower your credit utilization percentage by paying off your credit card debt. Having a low credit utilization ratio is good for your credit ratings. Statistics say 30% percent is key, however we propose 10% to maximize your credit score.
Remove Errors from Your Credit Report.
If you want to make sure the information on your credit reports is correct, you should check them. During a recession, the last thing you need is erroneous information lowering your credit score, making it harder to get credit, get a job, or find a place to rent.
Assume you come across false information, such as accounts you don't recognize. If your credit report reflects missed payments you didn't make or credit applications you didn't make, you should dispute these items. These things may indicate a simple error or identity theft.
Make sure you focus on old addresses regardless if they are accurate. Addresses, and phone numbers are indicators creditors/debt collectors use to verify accounts against your credit. So if you're trying to dispute and remove an old bill, start with the address, phone numbers, and employment history.
Create a rainy-day fund in case of emergency.
When life throws you a curveball, like losing your job, needing expensive car repairs, or having unforeseen medical expenses, having an emergency savings fund can help smooth the financial blow. It's wise to have three to six months' worth of savings set up. Even if that's impossible, any amount of preservation is preferable to none.
Having a savings cushion can help you weather financial storms and unplanned costs. Because you won't need to rely as much on credit cards or loans to get you through lean times, this strategy can also help you avoid sliding into debt.
In order to have financial security and easy access to funds in times of crisis, it is a good idea to set aside money each month to save in an emergency fund.
Quickly Acquire the Credit You Need
Do not put off starting the application process for a loan or credit card until later. During a recession, financial institutions are more choosy about who they do business with and how much credit they extend.
You shouldn't apply for a loan or credit card if you don't truly require the funds. Considerations such as your financial situation, the current state of the economy, and the interest rates now available should also enter into your selection. Even if you know you'll need credit in the event of a downturn, it's best to apply for it now while interest rates are still low.
Edit and follow your spending plan
Maintaining a balanced and sensible budget is always a smart idea. Even more so when the economy is in a slump, if you have a budget in place before a recession hits, you'll be able to see exactly where and how your money is being spent and make immediate adjustments to your spending if your income or costs change.
In order to determine which costs can be cut and which are essential, a budget is extremely useful. Even if your salary is unaffected by a recession, sticking to a budget will guarantee that you are living within your means and allow you to save more, which can help you get through the tough financial period.
Conclusion
When the economy is down, it's especially crucial to have a high credit score. Poor credit results in higher interest rates, which drives up the cost of borrowing money. During a downturn, credit can be a lifeline, but it may be more difficult to obtain as lenders grow more risk-averse and tighten their rules.
The steps you take to safeguard your credit during a downturn can serve you well in times of economic prosperity as well. You can't stop a recession from happening, but you can manage your finances so that it doesn't hurt your credit score.
