What is the relationship between your credit and an economic recession? Actually, your credit score and your access to credit products don’t necessarily go down when a recession hits.
A recession is out of your control. Your credit report reflects your behaviour.
The reason is simple. If you already manage your debt well, a recession has less impact on your creditworthiness.
The real power of a recession is its effect on your employment and income. If your credit report is strong, you may not have much trouble getting a loan during a recession.
What Is A Recession?
An economic recession happens when there is a long time of reduced economic activity. Economists and other experts sometimes define it as 2 consecutive quarters, which equals a total of 6 months, where real gross domestic product (GDP) goes down.
However, other experts look at business cycle dating. This includes income, sales, unemployment, and other indicators before they declare a recession. Furthermore, a recession impacts many sectors of an economy, not just one specific industry.
In fact, recessions are quite regular. Some recessions are longer and stronger than others.
What Do We Mean By Credit?
Credit is one of those things that you don’t realize the importance of until you need it. It can help you purchase a home, finance a car, or even just pay your bills.
You can use credit for anything. However, there are things you need to do to improve and/or maintain your credit score now so it is available to you if you need it later.
Even if you have money now, you never know when you may need to use it, especially now that inflation is high and a recession is looming.
How Your Credit Works
Before we go into how to improve your credit score, let’s go over some of the basics of credit and why it is so important. First of all, credit is based on 5 different factors:
- Payment History – 35%
- Credit Utilization – 30%
- Credit History – 15%
- Inquiries – 10%
- Public Records – 10%
As you can see from the breakdown, payment history makes up the highest percentage of your credit score. Making your payments on time not only builds your credit score but also gives lenders more confidence that you will make all your payments. Even making one late payment can have a negative impact on your credit score.
A close second to payment history is credit utilization. Credit utilization measures how much of your revolving credit (such as lines of credit and credit cards) you are using compared to what you have available.
Try keeping your usage to 35% or less of your available credit limit to protect your credit score. Even if you make your payments on time, high utilization will negate some of that impact.
Your credit history also makes a difference in your credit score, but not by as much as you would think. If there are any negative tradelines on your credit report, adding positive ones can still increase your credit score.
However, if you haven’t had credit before, your score will be a bit lower since you have no standing. The longer you have credit in good standing, the higher your score will be.
Lastly, inquiries and public records each make up a small portion of your credit score. Inquiries, also known as hard credit checks, will deduct anywhere from 5-15 points per check.
This is why it is recommended to keep credit checks to a limit of 5 or fewer per year. Public records would be things like bankruptcy, collections and consumer proposals. While these also will have a negative effect on your credit score, you can rebuild it.
Importance Of Credit
Credit is important for many reasons, and one of those is for borrowing. If you need to borrow money for any reason, the higher your credit score, the less interest you will have to pay. Lenders base their interest rate decisions on the risk of losing their money. If you have a good credit score, you are less likely to default on your payments, therefore they can give you a lower interest rate.
Credit scores matter when you apply for a new job, or try to rent an apartment or a home. Employers and landlords will often only run a soft credit check to verify that you are reliable and you pay your bills on time.
For employers, this is especially true in the finance industry. In fact, around 60% of employers will run a credit check before hiring you.
How To Improve Your Credit Score
Whether you need credit at the moment or not, you should try and have a good credit score just in case. That way when you need it, it will be available to you. Honestly, there could be so many reasons why your credit score is bad or needs work, but there are ways you can still improve your credit score.
The first way is to improve your payment history. If you have negative instances on your credit report, then the best way to get rid of them is to add more positive history to your report.
However, this is usually easier said than done. Many Canadian lenders won’t lend you money if you have a negative history. One way to improve your credit history is to correct any errors on your credit report.
Don’t worry. You do have options.
The Foundation
Getting approved for new positive tradelines can be difficult, but this is where The Foundation from Spring Financial comes in. It is a credit building product that allows you to build your credit while saving money at the same time. How it works is you have small monthly payments for 12 months. Over half of every one of your payments is then put into savings for you. At the end of the 12 months, you should have $750 saved. On top of that, all of your payments are reported to both Transunion and Equifax. Also included, is free access to your Equifax credit score which will help you track your score. If you don’t miss any payments, you should see your credit score start to increase. Once you have completed The Foundation and have $750 in savings, then you are eligible for the Evergreen Loan or you can cash out your savings.
The Evergreen Loan
The Evergreen Loan is a $1500 cash loan with an 18.99% rate for 18 months. Same as the Foundation, the Evergreen Loan will report monthly to both Transunion and Equifax. Since the interest rate on this loan is only 18.99%, you are looking at a biweekly payment of around $44.34 and a total interest cost of $229.20. Just like Spring’s other loans, this is an open loan that you can pay off at any time which will also save you on the interest cost. Once you have completed the Evergreen Loan, you are then eligible to restart, or you can see if you can qualify for a different loan.
When Is A Good Time To Borrow?
The best time to borrow is when you don’t need the money. What does that mean? Well, say you lost your job, and it’s going to be difficult to get a loan when you don’t have an income, even if you have a good credit score. That’s why it is important to have access to things like lines of credit and credit cards, just in case. You don’t have to use them, but if you need them they are there. It also helps to diversify your portfolio which keeps your credit score up.
Even if you do this, there is always a chance that you may still need to get some sort of financing to help out though. As long as you have an income of at least between $1,200 and $1,500 per month and this doesn’t exceed your debt-to-income ratio, you still may be able to get the loan. The only thing though, is that it might be at a higher interest rate.
Final Thoughts
Overall, credit is a great resource to have. It can open many doors for you and get you money when you need it the most. To keep your credit score intact it is important to make your payments on time, keep your credit utilization low and keep your inquiries to a minimum. Maintaining this score will make a big difference in your approval odds. That being said, we do realize that life happens and some things you just have no control over. If that is the case, Spring Financial can help you improve your credit score to help get on track to improving your overall financial health.
