Worried about a recession? Raising Your Credit Score Could Give You Peace of Mind

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It’s definitely a move worth making.


Key points

  • Rising interest rates could pave the way for an economic slowdown.
  • If you are now working on increasing your credit, you can buy yourself more borrowing options in case you need them.

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 rise in unemployment. That’s because companies might have to implement layoffs if they don’t see enough revenue.

If this is something to worry about, there are some steps worth taking now, such as increasing your emergency fund and securing 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 you with enough income to cover your expenses. And if you find yourself out of work for a while, you could deplete your savings.

But if you increase 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.

Likewise, while it’s generally not a good idea to fall back on credit cards to pay your bills, the reality is that in a recession, you may have to. But the higher your credit score, the more likely you are to qualify for a 0% introductory rate 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 lower your credit utilization ratio 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 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.

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