How to maintain your credit during a recession

A recession is an ongoing economic downturn where the gross domestic product (GDP) — a tool used to measure the health of the economy — is negative for back-to-back months. This is the result of many factors, such as inflation, rising interest rates or issues around the supply chain. One example you may have heard of is the "Great Recession" that happened in the U.S. in 2007-2009, when mortgage rates reached 6% and higher.

Recessions create a collective environment that affects everyone. While we as individuals can't do much to alter the underlying conditions that lead to a recession, there are ways to prepare and adapt to these uncomfortable circumstances. In this article, you will learn: 

• What your credit score is and what affects it 
• Steps to maintain your credit during a recession 
• How to improve your credit during a recession 
• Good credit habits

Know your credit score and what affects it 

When you're prepared for unpredictable events like a recession, it can help alleviate some of the shock and stress that may arise — that's why building/maintaining your credit score is key.

The first step to being a more prepared individual is to know what your credit score is — one simple way you can do this is by enrolling in Chase Credit Journey^® where you can request a credit report provided by Experian™ and a free VantageScore^® 3.0 credit score.

Next, you'll want to understand what that score means and what affects it. Depending on the scoring model used, the factors can be broken down into several categories. These include, but are not limited to: 

• Payment history
• Credit utilization
• Age/mix of credit

Steps to maintaining your credit during a recession

Now that you understand what can affect your score, let's discuss what can happen when a recession hits.

A recession is an external factor that operates above and beyond your personal credit score. However, it's a significant negative macroeconomic factor that might have lasting consequences — higher annual percentage rates (APRs), inflation, job loss and tighter borrowing conditions to name a few. These conditions can affect individual financial situations — including the ability to consistently pay debts on time — which may ultimately impact credit scores.

Rather, a series of events could compound and may eventually hurt your score. These events include wage freezes, layoffs and skyrocketing prices. 

If you're worried your score may suffer due to a recession, here are a few steps you can take to help protect and maintain it.

Step 1: Monitor your credit

Whether it's during a recession or not, you should always be monitoring your credit. Doing so keeps you proactive when it comes to managing your money goals and catching any errors or potential fraudulent activity. One simple way you can monitor your credit is by enrolling free credit monitoring services provided by Credit Journey^®.

Step 2: Build up your savings

If you can afford to build up a little life savings, it's a good idea to keep those funds secured and untouched in case a time comes where you need it. You can do this by creating a budget and cutting out unnecessary expenditures that you're OK living without. Putting that money towards a savings account can help buffer you in the future should you lose your job or the cost of living increases and tightens your budget.

Step 3: Be proactive and investigate your options

One of the many unfortunate consequences of a recession is wide-spread layoffs. If possible, try to establish a positive relationship with your employer. If a time comes where layoffs are inevitable, it's beneficial to be in a position where you can leverage your connections and secure employment somewhere stable. Investigate the unemployment benefits that may be available to you.

Being laid off can be scary and finding work can feel overwhelming, especially in the midst of a recession. There's no shame in seeking assistance from government entities — that's precisely what they're here for.

How to improve your credit during a recession

If you've been negatively impacted by a recession, you're not alone — whether you've been laid off among others at your company or struggling to keep up with rising costs, a recession can cause potential damage to your financial wellness. However, even during financial struggles, there are ways you can navigate through the many challenges and find a way to improve a damaged credit score.

Lower your credit utilization ratio

One way to improve your credit score is by trying to lower your credit utilization ratio, which is the ratio of your credit usage to your credit limit. If you find that you're using a higher percentage of your credit limit to cover costs, see if you can find ways to adjust your budget and use your credit card less. 

You may also want to think about paying off your debts sooner than later to avoid rising interest rates, which could cost you more in the long run.

Find additional ways to earn income

Even if a recession hasn't resulted in you losing your job, you may find that your current salary doesn't come with the kind of purchasing power it once did. Rising costs can reduce purchasing power, making your current salary feel smaller than it really is. Combat this by finding ways to pick up additional income — maybe that's by taking on part-time gigs on nights and weekends, or selling unused items from your home.

Continue to make payments where possible

Give that payment history accounts for a large portion of your credit score, it's essential to do your best to continue making regular, on-time payments towards your credit cards and loans.

Look around and take stock of current spending — it may be necessary to temporally cut out nonessential items like subscriptions, streaming services or regularly getting take-out. Doing this can free up much needed funds that can instead be applied to monthly payments. Remember: If you start to miss your payments, you could be at risk of hurting your score even more.

Don't be afraid to ask for help

Living through a recession is taxing in many different ways. You might be trying to keep food on the table for your family or struggling to find a new job. All of these added pressures can affect your mental health, and if you forget to take care of yourself, stress can begin to take over, making matters even worse. Don't be shy in asking for help where needed — whether that's financially or for your mental health.

You can seek guidance from a reputable credit counseling company to assist you with budgeting and managing your debts. Another option is to turn to a trusted friend you can talk to and help you feel a little less alone during these difficult times.

Good credit habits to have at any time

Building healthy financial habits is key to maintaining a good credit score, even during turbulent times. Remember, your score is not a reflection of your value as a person. Rather, it's an indicator of your creditworthiness at any given point in time. Once a healthy credit score is established, it can be used to help meet your specific financial goals.

A few good credit habits to have include, but are not limited to:

• Keeping a low credit utilization ratio
• Making payments on time and in full
• Keeping your credit cards open for a long period of time 
• Having a diverse credit portfolio

Taking small steps towards building healthy habits is key. One simple way you can do this is by enrolling in Chase Credit Journey. This free online tool can help build your knowledge and awareness about credit as well as provide services like credit and identity monitoring. Leveraging these resources can help you with building healthy patterns around your spending and credit.

Fortunately, Credit Journey^® now includes a score improvement feature to help you create realistic score goals. It could help improve your credit score by 5 points or more with a personalized action plan provided by Experian based on your credit report.

In conclusion

As you make consistent, healthy choices around your finances, you'll begin to see your credit score reflect positively over time. Having a healthy credit score and good money habits can help you stay stable during rocky economic environments. You may also have additional opportunities to land lower APRs and take out credit cards of your choice. Regardless of the context, being well prepared can help you navigate your credit journey during economically precarious times and set you on a course for financial health.