Image source: Getty Images
For months, many financial experts have been warning Americans to prepare for a recession. We cannot say for sure whether they are right or not. But the is reason to believe that we may be heading for a period of economic decline.
Right now, inflation is rampant and the Federal Reserve is trying to slow its pace by implementing interest rate hikes. The logic is that if borrowing becomes more expensive, consumers will begin to reduce their spending. Once this happens, demand will not exceed supply to the same degree as it does now, allowing the cost of goods and services to gradually come down.
But while a decline in consumer spending has the potential to dampen inflation, it could also trigger a recession and a noticeable increase in unemployment. That’s because companies might have to implement layoffs if they don’t see enough revenue.
If this is something that worries you, there are some steps worth taking now, such as increasing your emergency fund and ensure a secondary source of income if possible. But there’s another decision to make in light of a potential recession: raise your credit score.
Why good credit is important in a recession
During a recession, the unemployment rate can rise. And if you work in an industry that’s particularly vulnerable to layoffs during a recession — say, retail or hospitality — then you can, through no fault of your own, be laid off if economic conditions deteriorate.
At this point, your unemployment benefits may not provide enough income to cover your expenses. And if you find yourself out of work for a while, you could exhaust your savings.
But if you improve your credit score, you may have more borrowing options available to you if you need them. A good credit score could, for example, qualify for a Personal loan, which allows you to borrow money for any purpose. If you need help paying your bills, a personal loan could serve as your source of income until you find gainful employment.
Similarly, although it is generally unwise to fall back on credit card to pay your bills, the reality is that during a recession you may have to. But the higher your credit score, the more likely you are to qualify for a 0% launch rate to offer. And if you’re going to build up a balance, it’s best to do so with a credit card that won’t charge interest for a while.
How to increase your credit score
Raising your credit score takes work, but if you put in the effort, you could see that number increase dramatically. To do this, pay all your incoming bills on time. Just one late or missed payment could ruin your credit score, but a consistent pattern of timely payments could do the opposite – boost it.
At the same time, if you are able to pay off existing credit card debt, do so. This will reduce your credit utilization rate and help your score improve.
Finally, check your credit report for errors. If you spot a mistake, like an overdue debt you’ve since settled, getting it corrected could cause your score to rise quite quickly.
Strong credit is a good thing to have both in the best of economic times as well as in the worst. But since there’s reason to believe we’re headed for a recession, it’s worth doing what you can to boost your credit — and give yourself more peace of mind in case a recession really hits.
Alert: The highest cash back card we’ve seen now has 0% introductory APR through 2023
If you use the wrong credit or debit card, it could cost you dearly. Our expert likes this first choicewhich offers an introductory APR of 0% until 2023, an insane repayment rate of up to 5%, and all with no annual fee.
In fact, this map is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
