Chances are your wallet is feeling a little thinner lately. We’re in the midst of economic inflation – which means higher grocery bills, fuel costs, and prices across the board.
One way the Federal Reserve combats inflation is by raising interest rates. Unfortunately, while increasing the cost of credit can help control runaway prices, it can also trigger an economic recession.
Recessions are economic downturns marked by decreased consumer spending and rising unemployment rates. Nearly half of Wall Street professionals believe a recession is around the corner – and eight out of 10 small business owners agree.
Should you be nervous about a possible recession?
Recessions are a normal part of the economic cycle, but they can still disrupt our lives. Rather than panic, you can get prepared with smart money moves like growing your emergency savings, paying down debt, or picking up a side-hustle to diversify your cash flow.
One powerful strategy, however, is often overlooked: improving your credit score.In an economic recession, good credit helps save you money and bolsters your financial resilience.
Why does your credit score matter?
Lenders use your credit score to determine your “creditworthiness,” or how likely you are to pay your debts responsibly. The more positive your borrowing history, the higher your credit score – and the more likely a lender is to work with you.
Credit scores generally range from 300-850. According to FICO®, the most popular credit scoring brand used by lenders and credit scoring development companies, credit scores rank from “excellent” to “poor” as follows:
How can good credit help during a recession?
Lenders are more selective about to whom they extend credit during times of economic downturn. Should you need a new loan or credit card throughout this recession – good credit helps increase your approval odds. Good credit can also help you lock in the lowest interest rates possible as the Fed raises rates across the board.
Whether you’re opening a new credit card, taking out a mortgage, personal, or auto loan, or even applying for a private student loan – good credit helps you access lower interest rates.
Variations in interest rates may seem negligible. But when we look at the numbers, it’s clear: good credit can save you serious cash during times of financial uncertainty.
Take credit card interest. The following chart shows how increasing your score by less than 100 points can save you more than $3,000 in interest over the course of repaying a moderate balance of $6,000.
It’s possible to build credit quickly, even with a young or poor credit history. The following strategies are a great place to start:
Pay On Time: Repayment history has an outsized influence on your score, so do everything you can to pay on time each month (at least your minimum payment).
Get Current: Lenders can’t report delinquent accounts until they’re 30+ days overdue, so get caught up on late bills. If they’ve already hit your credit report, get current anyway. Delinquencies hurt your score less the sooner you pay them, and carry less weight over time.
Pay Down Debt: Carrying a high balance relative to your total credit limit indicates financial instability. Paying down your debt reduces your interest payments and gives your credit score a quick boost.
Use Credit-Building Tools: If you have few lines of credit, use credit building tools to build credit without taking on new debt. Tools like Stellar.
You don’t need to open a new credit card to improve your credit. In fact, since it’s harder to access favorable payback terms with poor or non-existent credit – opening a credit card can be a risky credit-building move. Tools like StellarFi help you build credit with your existing expenses instead of taking on additional debt.
The bills you pay should pay you back
Good credit can help you ride out the looming recession without compromising your financial stability. StellarFi is on a mission to make the benefits of good credit available to everyone, regardless of their credit history.
Getting started is simple. Just sign up, link your monthly bills – and blast off to better credit.
StellarFinance, Inc. and its affiliates do not provide financial, tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own financial, tax, legal, and accounting advisors before engaging in any transaction.
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