How to protect your credit during a recession

how to protect your credit during a recession


With some experts saying Australia might face a recession, it’s an excellent time to consider our credit. What will happen to it? And how can we keep it safe?

Even if we don’t end up in a recession, we know that our dollars aren’t stretching as far as they used to, which can also affect our credit.

Below is an explanation of how recession can change our credit and tips to protect it during tough times.

How does the recession affect credit?

A recession itself doesn’t directly lower your credit score. Instead, it’s the changes in our financial habits during these challenging times that can lead to bad credit. Maybe we start using our credit cards more often, or we might struggle to pay bills on time.

The following section discusses in more detail to give a clearer picture of how a recession can indirectly influence our credit health.

The indirect impact of the recession on credit

Recessions can create a domino effect on our finances. Although, as we mentioned earlier, they don’t directly harm our credit scores, the financial challenges they bring can indirectly lead to credit issues. Here are some examples:

Job loss or reduced income

One of the most immediate effects of a recession is job loss or reduced working hours. During the 1990 recession, for instance, the unemployment rate rose to almost 11%, starkly contrasting with the usual rate, which hovers around 3%. With less income, it becomes challenging to manage existing financial commitments, leading to potential late payments or defaults.

Increased expenses or unexpected bills

The stress of job loss or reduced income can lead to health issues, bringing along unexpected medical bills, especially if one’s health insurance is tied to their employment.

Also, the cost of everyday things, like food and electricity, can increase in a recession because businesses will try to cover their increased operational costs or declining revenues. This means that even our usual shopping might feel more expensive.

Trying to juggle these rising and unexpected costs on a smaller paycheck can be tricky. And if we can’t keep up, it might mean missing some payments, which is bad news for our credit score.

Falling property values

A recession can trigger a decline in property values. During the 1991-1992 recession, for example, house prices in Melbourne and Sydney dropped 10% and 9% respectively.

If you’re a homeowner, you might find yourself in a situation where your mortgage exceeds the current value of your home. Selling during such times could lead to financial losses, making it even tougher to manage other financial responsibilities, thus influencing credit health.

Business failures or reduced business income

If you’re an entrepreneur or business owner, you might have felt the effects of the 2020 recession in Australia firsthand. When the economy takes a hit, it often means fewer customers and reduced spending, which can lead to a dip in your business income.

Juggling both business and personal expenses on a tighter budget can be challenging. This can sometimes, in severe cases, lead to bankruptcy. Situations like these can have a lasting impact on your credit score.

Credit inquiries

You might explore various credit options during a recession to navigate the economic challenges. You could seek a financial safety net due to unstable income or consider consolidating debts for easier management.

Perhaps you’re thinking of refinancing a mortgage to take advantage of lower interest rates, or if you’re a business owner, you might need additional credit to keep operations running smoothly. Unexpected expenses or the desire to secure better loan terms might also prompt you to shop around, leading to multiple credit inquiries.

Credit inquiries, specifically hard pulls, can slightly lower your credit score by a few points. While one or two hard inquiries might not significantly impact your score, multiple hard inquiries in a short time frame can add up and become more detrimental in a short time frame. This is because potential lenders might view multiple inquiries as a sign that you’re seeking a lot of credit or facing financial instability.

More reliance on credit cards for everyday expenses

Under Australia’s Comprehensive Credit Reporting system, your repayment history is a key component of your credit report. When you rely heavily on credit cards for daily expenses, you might see your minimum repayments increase, especially if you’re nearing your credit limit.

Higher repayments can make it challenging to pay on time, increasing the risk of late payments or even defaults. Such negative marks on your credit report can signal to lenders that you might be facing financial stress. This perception can impact your chances of securing more credit or favourable terms in the future.

6 ways to protect your credit during a recession

1. Create a budget and stick to it

A well-planned budget is your financial compass during uncertain times. Outline your monthly income and expenses, prioritise essential costs, and eliminate non-essential spending. Sticking to a budget ensures you have funds for crucial bills and avoid unnecessary debt.

2. Build an emergency fund

An emergency fund is your financial cushion. To build one, start by setting aside simple savings, such as the change from your daily coffee, a portion of a bonus, or the money you might save from skipping a night out once a month. Even dedicating just $10 a week can add up over time. With this approach, you’ll gradually build a safety net, ensuring you’re prepared for unexpected expenses.

3. Regularly monitor your credit report

Credit report errors are more common than you might think. They can range from simple clerical mistakes, outdated information, to more serious issues like identity theft or fraud. By consistently checking your report,  you can catch and address these mistakes early on and maintain an accurate and healthy credit profile.

4. Communicate with creditors

If you anticipate difficulties with upcoming payments, it’s a good idea to avoid the situation by reaching out to your creditors. They often have systems to assist borrowers during tough times and might offer solutions or temporary relief.

Creditors are usually open to discussions, especially if it ensures you remain a paying customer. It’s worth exploring the possibility of modified payment plans or reduced interest rates.

But before doing so, understand consumer protection laws and your rights as a borrower. Position yourself in a place of strength during discussions or negotiations with creditors.

5. Manage debt

While negotiating with a creditor, ensure you are also finding ways to make your debts more manageable. One approach is the snowball method, where you pay off the smallest debt first while making minimum payments on larger ones. Once the smallest debt is cleared, you move to the next smallest, building momentum as each debt is paid off. This method can provide a sense of achievement and motivation to keep going.

6. Seek professional help

If you’re overwhelmed, consider seeking advice from financial counsellors or professionals. They can offer guidance, help you devise a debt management plan, and provide debt solutions.

Call Today for Credit Repair Help

Whether you’re looking for strategies on how to get out of debt or need personalised assistance, we can help. Contact us today and take control of your credit.


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