In recent months, inflation has received a lot of attention.
As a consumer, you’ve probably felt the pinch in your wallet. Many things have become more expensive.
Aside from the cost of things, inflation has caused many people to be concerned about their credit. However, it is vital to note that while inflation has no direct effect on credit scores, it can have an indirect effect.
This article will cover how inflation affects credit and everything you need to understand.
What is inflation?
Simply put, inflation arises when the expense of goods and services increases over time.
When high inflation suddenly rises while people’s income remains stable or slightly increases, it can cause financial strain. This can significantly impact people if the cost of important household goods that are frequently used rises.
The federal government monitors inflation using statistical measurements known as the consumer price index (CPI).
The CPI tracks consumer goods and services prices and separates energy and food cost measures. While many experts believe that inflation is only temporary and not cause for concern, many people are concerned.
What effect does inflation have on your credit?
Inflation has no direct impact on your credit report or credit score. Still, significant changes in the dollar’s value can create situations that harm your credit and limit your capacity to borrow money.
This is how it could happen –
Late payments on credit cards
During inflation, necessities such as groceries and gas increase significantly. If it reaches the point where you have to pick between buying groceries and paying credit card bills, you will likely choose the groceries. Because you are spending more money to purchase this, you will have less to pay your bills.
When this occurs, and you make late or missed payments; as a result, it can harm your credit.
The increased credit utilization ratio
Because inflation raises the cost of goods and services, many people resort to using their credit cards to cover their expenses. Higher credit card balances and utilization can impact your credit score, as these factors account for up to 30% of your FICO score.
According to the Consumer Financial Protection Bureau, maintaining a lower credit utilization ratio, preferably below 30%, demonstrates to lenders that you are a responsible borrower. Lenders prefer lower balances because they are more likely to be paid back.
Using your credit card excessively increases your debt, and paying it with a high interest rate leaves you with less money in your pocket, making it even more challenging to survive in an inflationary environment.
You should remember that credit utilization rate and late payments are two important credit scoring factors, so make your decisions accordingly.
How should you manage your finances during an inflationary period?
Managing your finances during inflation is possible with careful planning and a few strategies.
Here are some steps you can take to manage your finances during an inflationary period:
Try to sell extra items
There is a seller’s market for various high-cost assets when prices rise due to inflation. So, if you have any extra property, such as a car or a holiday home, that you want to sell, market demand and inflation can help you get a reasonable price.
However, ensure that you only sell items you no longer require and will not be necessary to replace them. This will cause inflation to work against you as a buyer.
Distribute your balances
Many people need to pay down their credit cards during inflation because they have less money. If you are one of them and do not want your credit score to suffer, you can spread your balances across your other credit cards.
Total credit utilization influences credit score, but how much you use each credit card also matters. Simply put, if you have a lower overall credit utilization, but one of your cards has almost reached the maximum limit, your credit score will suffer.
In this case, you can transfer the balance to your other credit cards and keep the balance on each card under 30%, which will help your credit score.
Become an authorized user
If you know people with good credit, you can request that they count you as an authorized user of their account. This will cause the card’s history to appear on your report, and you will not be liable for paying back any costs on the account. This will immediately boost your credit score significantly.
You should remember a few things if you choose this route. It is difficult to find someone to add you to their account because they will be legally liable for any charges. You will suffer the consequences if they stop paying for their cards or incurs significant debt. Make sure you only go to someone you can trust.
Consolidate your debt
Debt consolidation combines several debts, usually high-interest debts like credit card bills, into a single payment.
Debt consolidation is a good option for struggling people, as you can get a lower interest rate. This will assist you in reducing your total debt and reorganizing it so you can pay it off faster. If you make the payments and don’t accumulate more debt, your credit score will rise over time.
Before doing so, consult a certified professional and enlist their assistance in determining the best debt consolidation service provider for you.
Conclusion
Inflation, as it has in the past, can harm credit scores. It is critical to cut all unnecessary spending and plan your way through the difficult period. Keeping all of the adverse effects of inflation on your credit in mind and acting according to that can significantly assist you in protecting yourself and your credit from inflation.
About The Author:
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.
