When times are good and you have a steady income, managing your debt can be easy. But when a recession hits, job losses and pay cuts often come with it. If they affect you, it can be hard to stay on top of your bills and this can have a disastrous effect on your credit report.
Having a good credit report determines how much money a bank or finance provider is willing to lend you, and at what rate. It is particularly important if you’re hoping to get a mortgage.
Here are a few ways you can maintain a good credit report, even during a recession.
Check your credit report for errors
If you are worried about your credit report suffering, the first thing you can do is to get a copy of it to check for errors.
This report is a simple record of your bill-paying history, the total amount of debt, and how long you have been managing credit accounts for.
Checking your credit report for errors can improve your credit report. If a creditor mistakenly reports that you made a late payment, it can negatively impact your credit report and correcting this mistake may improve it.
Regularly monitoring your credit report can help you find and correct any mistakes before they have the chance to hurt it. You may want to consider using a free credit monitoring service, which can help you review any changes to your credit report and spot any potential errors.
Put aside an emergency fund to avoid going into debt
Recessions can impact your finances in multiple ways, from forcing you to take a pay cut to losing self-employed business as clients tighten their own finances. This is why it’s important to put aside some money in an emergency fund.
An emergency fund can help you to cover any monthly outgoings if the recession does impact your finances. This will help to keep your credit report in good standing by ensuring you can maintain your monthly commitments.
Experts recommend building an emergency fund of between three- and six-months’ worth of expenses, although you may want more if you are self-employed or work in a field that is particularly at risk.
Ideally, you should have an emergency fund put aside before a recession hits, but if you don’t have one, it’s never too late to start. By carefully managing your finances, you can put aside some money each month for this exact purpose.
If you are making cuts to your household budget, you can put any money you save into it as a financial safety net. To build it up faster, you could also deposit any ‘extra’ cash you come into unexpectedly, such as gifts or bonuses.
Adjust your spending habits to save money
Although it can be unpleasant, tightening your belt during a recession is an important way to manage your finances.
If you don’t already have a household budget, it may be a good idea to make one to help you see where you can save money. If you already have one, consider what expenses you can reduce.
While you’ll obviously have some fixed costs, such as mortgage/rent and Council Tax, if you make a record of your spending for a few weeks you may notice some areas that you can cut back on. This may include expenses like eating out, commuting to work, or leisure activities.
It’s important to try to stay within your limits so you don’t have to rely on your credit card as much.
If you do need to use your credit card, try to only buy things which you can pay off in one month. A large credit card balance might mean it’s hard to keep up with your payments if you lose your job or your household income is reduced, which can damage your credit report.
Catch up with due payments
Keeping up with your credit card payments is one of the most important things you can do to maintain a good credit report during a recession.
According to credit bureau Experian, your payment history is the most important factor used when determining your credit score. This is why it’s so essential to keep on top of your credit card payments.
It is strongly recommended that, if you are behind on any payments, you should catch up as quickly as you can to limit the impact it has on your credit report.
If you have several credit cards to keep track of, or have trouble remembering due dates for payments, you could consider setting up an automatic payment.
Get in touch
If you’d like to know more about maintaining or improving your credit rating, speak to us and we can help. Email enquire@london-money.co.uk or call us at (0207) 808 4120 to find out more.