Maintaining a Good Credit Score During an Economic Downturn

Paying your bills on time may be a relatively simple thing to do if your finances are healthy. But what happens when the economy takes a nosedive? How could a potential recession impact your financial health?

Currently, Canada's inflation rate sits at a hefty 6.9%, which is high enough to make most Canadians feel the financial squeeze.

During an economic downturn, it's not uncommon for consumers to see their credit negatively affected. Some consumers may over-leverage themselves by taking out loans to keep up with their expenses. Others may miss bill payments and see their credit scores dip. Either way, your access to credit in the near future could be impacted if you don't take steps to protect your financial health.

Read on to find out how to maintain a healthy credit score, no matter what's happening with the Canadian economy.

How do you protect your credit during a recession?

It can be easy for your financial situation to worsen and your credit score to dip during times of economic hardship. But keeping your credit strong during this challenging financial climate is crucial.

Consider some of the following ways to protect your credit during a looming recession, as well as to repair your credit if it's already taken a hit.

1. Check your credit score and report

Be sure to periodically check your credit. Not only will this show you what your score currently is, but it will also give you the chance to see if there are any mistakes on your report that could be unfairly pulling your credit score down.

If you notice any errors, report them to the respective credit bureau right away and have them fixed immediately.

2. Reduce your debt

Carrying a heavy debt load may also have a significant impact on your credit score. For starters, a lot of debt relative to your credit limit will increase your debt-to-credit ratio, which is a big component of your score. Generally, the higher the ratio, the worse it may impact your credit score.

In addition, poorly managed debt that's not paid on time or in full each billing period can also hurt your credit score. Paying your bills on time and keeping your debt-to-credit ratio below 30% can help build or maintain your credit.

3. Consider debt consolidation

If you're having trouble whittling down your high-interest debt, consider applying for a debt consolidation loan. Consolidating your debt will not only make it easier to manage, but it can also save you in interest charges, given that you secure a low-interest rate loan. With a lower rate, you'll be paying less over the long run, which will help you become debt-free sooner.

4. Keep an eye on your spending

Spending against your credit can not only increase your debt load but raise your debt-to-credit ratio, which can negatively impact your credit scores. Especially during times of economic challenges, it's essential that you keep your spending under control and track it so you know exactly how much money you're spending versus what you earn.

While you can't do much about basic expenses like rent, mortgage payments, groceries, and utility bills, other costs incurred may not be necessary. Consider scaling back on leisurely expenses, like subscription services or entertainment costs.

Go through your bank or credit card accounts and add up how much you spend each month. Consider where you can make cuts to your spending so there's more money available every month that you can put toward your debts.

5. Build credit with KOHO

Building credit is easier when you have access to credit accounts and loans. But if you have bad credit, it can be tough to get approved for these financial products. Luckily, there are credit-building tools available such as KOHO’s Credit Building Program. They’re designed specifically to help consumers establish good credit or improve their damaged scores.

KOHO’s Credit Building Program is a subscription-based program. When you subscribe, they’ll open a line of credit for you and use your subscription payments as payments towards the line of credit. Every timely payment you make will be reported to a credit bureau which can help you build your payment history.

Once you register for KOHO's Credit Building Program, you can also check your current credit score.

Credit cards, credit scores and recessions

A recession can impact your finances and credit in many ways, whether directly or indirectly. For instance, maybe your employer slashed your hours at work, leaving you with less money to pay your bills on time. This can not only affect your finances but your credit as well if you’re unable to keep up with your payments.

If you find yourself in this situation, here are a few tips for using credit cards to protect your credit score or repair damaged credit during a recession.

Use your credit card for small purchases

Having a credit card is a great way to build good credit or improve your score, as long as you use it wisely.

Keep your expenditures as low as possible to avoid a high credit utilization ratio. In general, credit cards should be used to make small purchases and should be paid off in full to keep your utilization ratio low and maintain a positive payment history.

Choose a prepaid card over a credit card

If you can't get approved for a traditional unsecured credit card, consider applying for a prepaid credit card. Many financial institutions offer prepaid credit cards with similar benefits as regular credit cards.

For example, KOHO's prepaid Mastercard and mobile app can give you some of the perks of a traditional card without having to meet stringent qualifications. To use a KOHO prepaid Mastercard, you simply need to load your card with cash. After that, you can use the card anywhere that Mastercard is accepted. The best part is you can earn up to 5% back on purchases with our cash back partners and there are no hidden fees.

Consider a secured credit card

If you can't get approved for a traditional unsecured credit card, consider applying for a secured card. These cards are much easier to get approved for and can be used to build good credit.

As is the case with a conventional unsecured card, timely payments made on your secured credit card go towards your payment history, which plays a key role in the health of your credit score.

Eventually, you may be able to qualify for an unsecured credit card, as well as other credit products.

Stay up-to-date with changes to credit card surges and regulations

Your credit card company could potentially increase your interest rate on card balances, which will make your credit card expenditures more costly. That said, creditors are required to notify you at least 45 days before they decide to boost your rate, change certain fees, or make other big changes to the terms of your agreement.

As such, keep an eye out for these communications so you're not caught off guard and stuck with high costs.

If your credit card issuer does decide to hike the rate and fees, you'll be equipped with the information you need to either revamp your budget or look elsewhere for a card with a better rate.

Staying afloat with your finances during a recession

During times of economic trouble, it can be challenging to maintain your credit and keep your finances afloat. The last thing you want is to default on your loans and potentially lose your valuable possessions, like your car or even your house.

Here are a few tips to help you keep your financial health safe during a recession.

1. Get your financial house in order

With a recession on the horizon, you'll want to make sure you've got a solid handle on your finances. You should have a clear understanding of how much money you have on hand to cover all necessary bills over a specific time period, like 3 months, 6 months, or a year or more, especially if you lose your job or another source of income.

Knowing how much you spend today as well as how much you may have to spend in the near future without a major source of income will ensure that you're not caught off guard financially in the event that things take a turn for the worse.

Get rid of as much debt as you can, stash away as much money as possible, and reduce your leisure spending to a minimum.

2. Create an emergency fund

Having a financial cushion to fall back on is crucial to stay financially afloat during a financial crisis. With inflation on the rise, the Canadian dollar isn't going as far as it used to. In general, it’s recommended that you have 3 to 6 months worth of income saved in case of emergencies.

There are some tools available that can make building an emergency fund easier, like KOHO's savings account. You'll earn 0.5% interest on your entire balance, 1% cash back on groceries, transportation, and up to 5% with our cash back partners. Plus, there are no hidden fees and no minimum balances to maintain.

3. Create a bulletproof budget

It's one thing to have a basic idea of what you earn versus what you spend, but now's the time to get really detailed and serious about creating a working budget. Determine your total household income from all sources, list your monthly fees, and identify your most important expenses so you know how much you can spend each month just to stay afloat.

Final thoughts

An economic downturn can hurt your finances, which in turn may affect your credit scores. That said, there are plenty of things you can do to protect your credit score or even improve it during a recession. Coming up with a budget, slashing expenses, and taking advantage of various credit-building tools can help ensure your finances can still cover all your bills while keeping your credit score healthy.