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During a recession, you may feel the need to adjust some of your money habits, including how you spend and save. Some of these tweaks may help you solidify your financial footing: Maybe you’re cutting back on certain expenses or stashing more money into an emergency fund.
But other habits could get tricky, especially when it comes to your credit cards. Perhaps you’re putting a little more on your credit card each month rather than using your debit card, or just making your minimum credit card payment instead of paying your bill in full.
Even though these practices may make sense in the short-term, they could end up backfiring down the road.
As you’re adjusting how you manage your cards, particularly in leaner times, you want to be sure you’re not cementing habits that could potentially ding your credit score. While it may not seem like a huge deal in the moment, rebuilding your score could take longer than you think.
Plus, a solid credit score could get you more favorable lending terms (more on that below) so it’s worth remembering that good habits now could pay off (literally) in the future.
Ahead, we’ll cover some tips for maintaining or building a good credit score, even during a recession.
You’ve probably heard a few dozen times that it’s a good idea to keep your credit score up. (We even mentioned it earlier!) But what exactly will a good credit score get you? And what is considered “good?”
Here’s the gist. In our modern lives, we frequently rely on credit, which is essentially borrowing money to finance items we may not be able to immediately afford and that we can then pay back over a specified period of time. That includes everything from getting a loan to buy a home or car, or swiping your credit card for takeout or travel.
To get access to that credit, you’ll typically need to prove to issuers that you can handle your finances responsibly, which is where your credit score typically comes into play.
Your credit score helps potential lenders determine how “creditworthy” or not you are – essentially, if you’re likely to handle a line of credit responsibly, and using your credit history to determine how you’ve handled your debts in the past.
The higher your credit score the more responsible and creditworthy you could appear to a potential lender, and that can come with some pretty great benefits.
So, what are banks, or creditors, or landlords looking for? A “good” FICO credit score ranges from 670 - 739. “Very good” is considered to be anywhere from 740 - 799, and an “excellent” credit score is 800 and above.
Here are some of the potential benefits available to folks with very-good-to-excellent credit scores:
These (possible) benefits of a higher credit score come from potential lenders acknowledging your great credit score as a sign that you are a responsible and trustworthy applicant, with the score and history to back that up.
Now that we’ve covered the numerous ways in which a good credit score can benefit you (and the perks are probably enticing!) let’s jump into what you can do to either help build or maintain that good credit score.
This might be one of the toughest habits to keep up with, especially during a recession. And we get that. If money is tight, it can be tempting to make your minimum payment on your bill, rather than paying in full each month.
But even if it seems like an OK trade-off in the moment, just making the minimum payment could come with a downside: The interest you get charged on your remaining balance can add up quickly, especially when you take into account the high APRs credit cards could charge.
So, while it might feel like you’re saving money in the short-term, it could end up costing you a lot more down the road.
You’ll also want to pay your bills on time, no matter what you choose to put down. During a recession, you might have a lot off added stresses, making it more difficult to remember small details like when your next credit card bill is due. If that’s the case, consider setting up calendar reminders or enrolling in auto-pay to stay on track.
Payment history accounts for 35% of your FICO score, so a missed or late payment has the potential to be more damaging than you might think.
Take a look at a credit card account and you’ll notice that each card comes with a limit (that’s probably not news to you!). Your credit utilization ratio at looks how much of your available credit you’re using at any one time compared to what your limit is.
To find out what yours is, divide the sum of how much you owe by your available credit. You can calculate it cumulatively across all of your cards or per individual card.
Why does this number matter? Your credit utilization ratio is another major contributor to your credit score, accounting for 30% of your FICO score.
It’s recommended to keep your credit utilization below 30%, total and for each card. So, if your available credit across all of your credit lines is $20,000, ideally you want to be using $6,000 or less of it at any one time.
This is especially good to keep in mind during a recession, when you may be putting more bills and expenses on your credit accounts.
You might also be considering closing a credit card account if you haven’t been using it as much lately. While that could be a good thing if you’re paying a high annual fee on the card, you should be aware that closing an account also has the potential to impact your credit score.
That’s because closing a credit card will likely decrease your overall available credit. If your expenses don’t change (aka your credit usage stays the same), your credit utilization ratio could jump up, potentially dinging your credit score.
Your credit mix is basically how many different types of credit accounts you have. It may include any credit cards you hold, as well as any personal loans, auto loans, mortgages, etc. Your “credit mix” accounts for 10% of your FICO score.
When you manage a variety of accounts well, it shows lenders that you’re responsible and may be a less risky borrower.
That being said, it’s probably not a good idea to acquire debt just to try and boost your score. Yes, may be able to get approved for a car loan and those low recession interest rates may be tempting.
But can you pay it off and on time each month? Recession or not, it’s important not to take on more than you can chew, money-wise.
Here, we’re specifically talking about the age of your credit accounts. The length of your credit history accounts for 15% of your FICO score, so a longer credit history typically bumps up your credit score.
Your credit history starts with whenever your first credit account was opened (being an authorized user counts, too!). And your credit history length is calculated by dividing the ages of your oldest and newest accounts by your total number of accounts.
In terms of how to use this factor to your advantage during a recession, we come back to not closing your credit card accounts (when feasible). During tougher economic times, you might be trying to cut back on your spending, so you could be thinking about closing any credit cards you’re not using on a regular basis.
However, depending on which account you’re considering closing, you could shorten the length of your credit history. And that could lead to a dip in your score.
If having multiple open credit accounts is causing you too many problems in terms of your spending and you absolutely want to close an account, closing a newer account may be a better bet.
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.