When shopping for a home loan, one of the essential ingredients for success is a relatively good credit score. Borrowers who took out a mortgage in the second quarter of 2021 had an average credit score of 786, according to the Federal Reserve.
Not only do lenders require borrowers to meet specific credit score requirements, but a good credit score can also help you get the best rates. If you are planning to buy a house in the near future, it is necessary to protect your credit score.
The looming economic storm clouds make protecting your credit even more important. The likelihood of the US economy slipping into recession over the next 12 months has risen from 50% in September to 60% this month, according to a Bloomberg survey of economists.
If buying a home is on your radar, protecting your credit score is a must. Although it’s a little tougher during a recession, staying flexible and prioritizing your credit score offers a way to protect this financial tool.
Let’s explore some of the strategies you can use to protect your credit during a recession.
Increase your savings
When the economic storm arrives, it is impossible to know what awaits us.
“We don’t know how long the economic downturn will last or how far inflation will go,” said Cameron Burskey, managing director of retirement security at Cornerstone Financial Services.
“Seeing that the cost of goods has increased dramatically, and we don’t know when that will stop, it means you will need more money to live on day to day,” he said. “Neing more money to live from day to day means less money in your checking account.”
The reality is that everyone faces some level of uncertainty about their job security. If you have lost your job or your money is not enough, it can be difficult to cope with paying off your debts. And unfortunately, late payment of your debts can negatively affect your credit score.
Burskey recommends that you “double up on your short-term savings account to make sure you have a good cushion to lean on.”
If you can make the necessary changes to your budget, start building an emergency fund for whatever a recession might throw at you. Many experts recommend saving between three and six months of expenses in your emergency fund. But the amount you can save will vary depending on your situation.
Pay off the debt
Heading into a recession with huge debts is a risk. If you lose your income, you could find yourself in a difficult situation unless you have a large emergency fund.
“If you can pay your bills now, you’ll have more wiggle room in your budget later because you won’t have to worry about making that payment,” said Levon L. Galstyan, an associate CPA at Oak. View Law Group.
Galstyan recommends, “Credit card debt and other higher interest rate debt should be prioritized first, followed by car loans, mortgage payments and personal loans.”
When you pay off your debts, the benefits are twofold. First, you will have fewer obligations later on if your sources of income dry up. Second, you reduce your credit card usage rate, which can boost your credit score.
Make payments on time
Even if you’re making progress paying off your debt, you may still have several debt payments due each month. Although a recession can make it difficult to make on-time payments, it’s essential to make it a priority.
Ideally, your income streams will give you the ability to make payments on time each month. But if you lose your job and run out of emergency savings, it may not be possible to make ends meet.
For those who are in a difficult situation, be sure to communicate with your creditors.
“If you’re in a situation where you’ve lost your job and you’re late, contact your creditors. They may be able to defer some payments until you’re back on your feet,” said Andrew Rosen, CFP and President of Diversified. LLC.
By making sure your basic credit payments are made on time, you’ll protect your credit score as the economy takes us on a roller coaster ride.
Take a look at your expenses
Since a recession brings uncertainty to everyone’s finances, it helps to keep an eye on your budget.
“If you’re not budgeting, now might be a good time to work on budgeting and tracking your expenses to make sure you’re not spending more than you need to,” Rosen said.
When you keep an eye on your expenses, you can create a reasonable budget for your situation. For example, you might find room to cut back on discretionary purchases for a few months to bolster your emergency fund. Or you will know what is relatively easy to reduce in your expenses if you run into a shortage of money.
Consider another source of income
One of the biggest threats during tough economic times is losing your job. Without money coming in, it can be difficult to stay afloat and protect your credit score. Building a second stream of income provides some level of credit score protection during a recession.
Even if you lose your job, the second source of income can help you get your credit payments under control. With Zapier reporting that one in three Americans has a side business, you’d be in good company if you took the plunge.
Monitor your credit score
Regardless of the economic climate, it is useful to monitor your credit score. When you check your credit report regularly, you can make sure everything is accurate. If you spot a mistake, you can get it fixed before it has too big of an impact.
This article by Sarah Sharkey originally appeared on property owned by Three Creeks Media, LLC or its affiliates, as mutually agreed.
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