The financial effects of a recession are dire, often resulting in lost employment, dipping credit scores, and crippling bills and debt. And when you’re financially unprepared, you risk facing bankruptcy.
During a recession, many people often take out loans from creditors and money-lending companies as a stop-gap solution. However, there are several risks that can harm your credit reports, such as failing to make timely payments and incurring penalties and fees from your creditor and debtors.
Whether it’s the loss of income or the increase in pricing for a variety of consumer goods, your credit may be the most crucial part of your financial goals. What can you do to protect your credit during a recession?
How Recession Affects Creditworthiness
While a recession won’t have a direct impact on your credit score, the additional cost of goods and increase in spending to keep up with this can lead to additional credit usage. As the potential for job loss and pay cuts is looming, it’s easy to look at credit cards as the answer.
While there is nothing wrong with utilizing credit as a stop-gap option to help with unexpected expenses, in the long term, the inability to repay the loans can seriously impact your creditworthiness. When using or accessing unsecured debt to tide over unexpected setbacks or expenses, it’s essential to consider whether the loan will be serviceable.
Applying to multiple lenders is a good way to hedge your risk if your loan application is rejected by one lender. Your credit score could also be negatively affected if you apply for too many loans during a recession. Loan applications are considered hard inquiries by credit bureaus, and their records are kept.
The good news is that your credit score impact will be short-lived, and you should be able to recover from multiple inquiries quickly. A variety of debt settlement programs can help you reduce your debt, but you can also build a debt management plan tailored to your financial situation.
Build An Emergency Fund
A good place to start is by building an emergency fund. In addition to protecting your credit, having an emergency fund can keep you from accumulating debt by not relying solely on your credit card for financial needs.
The common wisdom here is that you should save at least three to six months of living expenses in an account where you can get to it easily and quickly. A savings account is a great place to keep these funds.
Stick To A Budget
Living within a budget is always a good idea, but it’s an especially important one during a recession. Allocate your funds wisely by creating a budget plan and sticking to it. A pre-planned budget will also allow you to adjust accordingly if your income decreases quickly.
By living within a budget system that works for you, you again prepare yourself to weather any difficult financial periods without increasing debt by relying heavily on a credit card.
Don’t Take Unnecessary Loans
Whenever you borrow money, make sure you only take what you need. When you overleverage your credit sources, you can spend what you don’t have and spiral into a dangerous habit. Leaning on unsecured debts during this time can also bring additional hardship post-recession.
If you need a loan, make sure you have the financial means to repay it, especially during an economic downturn. Borrowing responsibly can be a great way to handle a financial crunch or sudden need.
Defaulting on a loan may adversely affect your creditworthiness and even force you to liquidate or surrender assets amidst a financial crunch.
Pay Off Existing Debt
It always makes sense to pay off existing debt, but by paying down your debt sooner than later, you allow yourself to reallocate those funds to other areas of need. You can improve your credit score by paying off your debt, which allows you to avoid interest.
Beyond improving your credit utilization ratio, this step also frees up your credit for when you might really need it most. For those in retail or whose income is primarily derived from commissions, an economic recession can result in reduced wages and compensation. During times of need, available credit serves as a sort of emergency fund.
When it comes to paying off debt, there are no shortcuts or one-size-fits-all solutions, but you can employ some strategies to get on track:
- The snowball method: Pay off your smallest debt first, and make minimum payments on your other debts until you’ve paid off all of them.
- The avalanche method: Paying off debts based on the percentage interest rate. Unless your budget permits you, you pay off your debt at the highest rate as quickly as possible, paying just the minimum on all your other debts. After paying off the debt with the highest interest rate, move on to the next highest interest rate debt.
Both methods can be effective. Choose wisely depending on your personal financial situation.
Debt Settlement During The Recession
Credit card debt can also be reduced through another option: debt settlement through a debt relief expert like Alleviate Financial. You can overcome expensive credit card debt by consulting with debt settlement services.
Our goal at Alleviate Financial is to help you strategize before credit card debt becomes a problem. Get in touch with Alleviate Financial’s professionals today to schedule your debt relief consultation!