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It’s a Recession! Who Cares About Credit Scores

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If Covid-19 wasn’t enough to put 2020 on the map, then the recession declared in June is a pretty good contender. With a lot going on, it’s understandable if paying bills and keeping an eye on credit scores may feel less important.

But, as bumpy or uncertain as things may be, paying bills on time and protecting your credit score still matter. This isn’t to say focusing on these financial practices is easy – we’re humans, too – but good economy or bad, it’s wise to look out for them. 

Let’s get down to why keeping bills and scores top of mind is important, even now, and some ways to tackle them.

Why you need to bother with your credit score during a recession

In general, the higher your score, the lower the interest rates you’ll likely be offered – which could save you money – and the more funds you may be able to borrow in the future.

Although you may not be thinking about borrowing money now, what you do now could have long-term repercussions, impacting your future interest rates and lending options. For example, some events like a bankruptcy or charged-off debt can sit on your credit report for years. 

And making payments on time matters for your score, too: Your payment history accounts for about 35 percent of your FICO credit score and missing payments could drop your score; FICO research notes that missing several bill cycles, for example, could lower a credit score by as much as 130 points, according to research from FICO. 

How to set yourself up to make payments simple

One word: Automate. To take paying things like credit cards bills and loan payments off your to-do list, consider tools like automatic bill payments (AutoPay if you’re automating payments for a personal loan from Marcus). 

The details of each payment service may vary a bit, but the idea is the same: You set up recurring payments so money automatically travels from your bank account to your creditor’s every month. 

It’s a lot like feeding your 401(k) or IRA with recurring deposits, except here, the money is going towards bills and could help you build a nice record of paying on time.

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How to handle high APRs

Automatic payments could simplify paying bills on time, but if you’re also looking to streamline multiple debts, consolidating them using balance transfer cards and debt consolidation may help. 

Neither of these options will make your bills disappear, but they could save you money if you end up paying less interest on them.

A short rundown on how these work:

A balance transfer card is a credit card that you roll other credit card debt onto. The benefit is typically in the interest rate – you may find cards with an introductory APR that’s lower than what you’re paying on one or more cards, or even 0%. 

Sounds like a win, but, a key part of the description here is the term “introductory offer,” as in, a rate that expires after a certain amount of time. In addition to vetting the APR and any fees (including if there’s a fee for transferring the balance), you’ll also want to consider what happens to your rate if you miss a payment, how long the low rate will last, and how long you need to pay off the balance. 

If it’ll take you longer than the introductory period to pay off the debt – and even if it won’t, it’s good to know just in case – see what the replacement rate is and determine how much you could end up paying in interest.

Debt consolidation can work in a few ways, such as paying off debt with a personal loan. In this case, you’d get a personal loan and use the funds to pay down the debts. Then, you’d turn around and repay the personal loan. 

If you have a high credit score, this could be worth considering because the interest rates on personal loans could be lower than the ones on your credit cards. Just like with a balance transfer card, you’ll want to check the APR and look into any fees. 

Two additional things to consider: How much interest you’ll end up paying by the end of the loan’s term (for comparison’s sake) and how much you will have to pay every month. Unlike a credit card, where you can pay between the minimum amount due and the full balance, with installment debt, you pay the monthly balance that’s due in full or you could pay more.

How to build and keep a good credit score

There’s nothing like a recession to prompt a good, hard look for smart ways to build or maintain a credit score. But the rules are the same regardless of how the economy is doing. 

These include:

  • Paying bills on time and in full
  • Applying for credit only when you need it
  • Not maxing out your credit lines and keeping overall credit use in check (This is called credit utilization and the general guideline is to use less than 30 percent of your total credit limits. This article goes into more detail)
  • Repeating all of the above

How to stay motivated

The rewards of a good payment history and credit score can feel a ways off, particularly if you’re not in the market for a new credit card or loan. There are a few things that could help you stay on track until you’re ready to borrow:

  • Watch your credit score regularly. You may be able to see your score for free though your bank or credit card company, or you can reach out to one of the three major credit bureaus (Experian, Equifax, TransUnion), but there could be a fee. 
  • Research the type of credit score you’ll need to qualify for certain long-term goals like buying a car and make it a target.
  • Track the interest you’ve saved by paying on time and drop it into a savings account.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.