Worried About a Recession? Boosting Your Credit Score Could Give You Peace of Mind

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KEY POINTS

  • Rising interest rates could set the stage for an economic downturn.
  • If you work on boosting your credit now, you can buy yourself more borrowing options in case you need them.


It's definitely a move worth making.

For months, many financial experts have been warning Americans to brace for a recession. We can't say with certainty whether they're right or not. But there is reason to believe we could be headed 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 gets more expensive, consumers will start to cut back on spending. Once that happens, demand won't exceed supply to the same degree that it does now, thereby allowing the cost of goods and services to gradually come down.

But while a pullback in consumer spending has the potential to cool inflation, it could also spur a recession and a notable uptick in unemployment. That's because businesses might have to implement layoffs if they don't see enough revenue come in.

If that's something you're worried about, there are certain steps worth taking now, like boosting your emergency fund and securing a source of side income if possible. But there's another move worth making in light of a potential recession -- boosting your credit score.

Why good credit matters during a recession

During a recession, the unemployment rate has the potential to rise. And if you work in an industry that's particularly vulnerable to layoffs during a recession -- say, retail or hospitality -- then you may, through no fault of your own, be laid off if economic conditions deteriorate.

At that point, your unemployment benefits may not provide nearly enough income to allow you to cover your expenses. And if you end up out of work for quite some time, you could deplete your savings.

But if you boost your credit score, you may have more borrowing options at your disposal should you need them. A strong credit score could, for example, make it possible to 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 an income source until you're gainfully employed again.

Similarly, while it's generally not a good idea to fall back on credit cards to pay your bills, the reality is that during a recession, you might have to. But the stronger your credit score, the more likely you'll be to qualify for a 0% introductory rate offer. And if you're going to rack up a balance, it's better to do so on a credit card that won't charge interest for a period of time.

How to boost your credit score

Boosting your credit score takes work, but if you put in the effort, you could see that number rise substantially. To do so, pay all your incoming bills on time. A single late or missed payment could wreck your credit score, but a consistent pattern of timely payments could do the opposite -- raise it.

At the same time, if you're able to pay off some existing credit card debt, do so. That will lower your credit utilization ratio and help your score improve.

Finally, check your credit report for errors. If you spot a mistake, like a delinquent debt you've since settled, getting it corrected could cause your score to rise somewhat quickly.

Strong credit is a good thing to have in both the best of economic times as well as the worst. But since there's reason to believe we may be headed for a downturn, it pays to do what you can to boost your credit -- and buy yourself more peace of mind in the event that a recession really does hit.

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