Nobody knows when — or even if — a recession will hit the economy. But it's hard not to worry about how an economic downturn would affect your finances.
A recession can affect your employment and earnings. If you're not prepared, you may find yourself turning to debt to pay for the basics, which can inflict long-lasting damage to your credit score.
But you can take steps to protect your creditworthiness during a bad economy. CNBC Select sat down with Rod Griffin, senior director of public education and advocacy for Experian, and talked about what you can do to prepare your credit for a potential recession.
1. Keep an eye on your credit
The first thing Griffin recommends is checking your credit. "You can't do anything about it until you know what's there."
To keep your credit safe, it's critical to know what's on your credit reports. This will help you spot your weak spots, your strengths and what habits you may need to change.
Normally, you can get a free copy of your credit report once a year from each bureau at AnnualCreditReport.com. But right now, due to the pandemic, you can get free reports weekly through December 2023.
Reviewing your reports isn't the only way to monitor your credit health. You also can sign up for a credit monitoring service that lets you regularly check your credit. CNBC Select's favorite options include CreditWise® from Capital One to monitor your VantageScore (which you can use whether or not you're a Capital One cardholder and is free) and IdentityForce® UltraSecure and UltraSecure+Credit, a more comprehensive service that also checks the dark web for your personal information (among other services). Keep in mind that because it provides more than monitoring, IdentityForce charges a yearly fee.
IdentityForce®
Cost
UltraSecure Individual: $19.90 per month or $199.90 per year; UltraSecure+Credit Individual: $34.90 per month or $349.90 per year; UltraSecure Family: $24.90 per month or $249.90 per year; UltraSecure+Credit Family: $39.90 per month or $399.90 per year
Credit bureaus monitored
3-bureau credit monitoring, alerts and reports: Experian, Equifax and TransUnion®, with UltraSecure+Credit Individual and UltraSecure+Credit Family plans only
Credit scoring model used
VantageScore® 3.0, with UltraSecure+Credit Individual and UltraSecure+Credit Family plans only
Dark web scan
Yes, with all plans
Identity theft insurance
Yes, at least $1 million with all plans
Terms apply.
2. Develop good saving habits
In a tough financial situation, you don't want credit to be the only safety net you have. "Credit can be a very useful tool in that regard," Griffin says. "The risk is that you become too dependent on credit... Then it can become a problem."
To avoid getting hooked on credit, develop healthy saving habits and make sure your emergency fund is in good shape. It's generally recommended your fund have three to six months' worth of basic living expenses. If you feel you can't afford to save that much, start small. Every bit you put away can help, especially if you're consistent with the saving.
"It's about being prepared," Griffin says. "We say it all the time, but you need to have emergency savings because you just don't know what life will bring."
When deciding where to put your savings, pick one with a high APY such as the Happen Bank LevelUp Savings account. That way your emergency savings can earn you more money in interest payments than it would otherwise.
Happen Bank LevelUp Savings
Annual Percentage Yield (APY)
4.00% (with monthly deposits of $250 or more), or 3.00%
Minimum balance
None
Monthly fee
None
Maximum transactions
None
Excessive transactions fee
None
Overdraft fees
N/A
Offer checking account?
Yes
Offer ATM card?
Yes
Terms apply.
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3. Pay down your credit card balances
If you already have credit card debt, paying it off should become a priority. With credit card interest rates continuing to reach new heights, you don't want to get stuck with credit card debt if a recession hits. It's not only hard on your wallet because of interest charges — it can also hurt your credit score.
The credit utilization ratio, or how much of your available credit you're using, is the second most important credit factor after payment history. If you're using more than 30% of your credit line, it can have a significant negative impact on your scores.
Further, if you lose income during a recession, it may become difficult to keep making card payments. Missed payments are the worst thing you can do to your credit score and they stay on your reports for seven years.
For that reason, it's best to get rid of credit card debt as soon as possible. If your credit is good (and your score is 670 or greater), it may be a good idea to look into a balance transfer credit card which will allow you to pay off your balance interest-free — as long as you finish paying during the introductory period. Here are some of CNBC Select's top picks for the best balance transfer cards:
The Wells Fargo Reflect® Card can help you save on interest charges thanks to its extra generous intro-APR offer on purchases and qualifying balance transfers.
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- Apply Now to take advantage of this offer and learn more about product features, terms and conditions.
- 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. 17.49%, 23.99%, or 28.24% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate, BT fee of 5%, min: $5.
- $0 annual fee.
- Up to $600 of cell phone protection against damage or theft. Subject to a $25 deductible.
- Through My Wells Fargo Deals, you can get access to personalized deals from a variety of merchants. It's an easy way to earn cash back as an account credit when you shop, dine, or enjoy an experience simply by using an eligible Wells Fargo credit card.
Balance transfer fee
5%, min: $5
Foreign transaction fee
3%
The Citi® Diamond Preferred® Card is one of the best balance transfer credit cards and also has a generous intro APR offer.
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- 0% Intro APR on balance transfers for 21 months and on purchases for 12 months from date of account opening. After that the variable APR will be 16.49% - 27.24%, based on your creditworthiness. Balance transfers must be completed within 4 months of account opening.
- There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).
- No Annual Fee - our low intro rates and all the benefits don't come with a yearly charge.
- Buy now and pay later. Split your payment for eligible purchases of $75 or more into a fixed payment with Citi® Flex Pay.
- Get free access to your FICO® Score online.
Balance transfer fee
There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).
Foreign transaction fee
3%
4. Avoid taking on debt without a plan
If you do need to use credit, come up with a repayment strategy before you do it.
"Make sure that you have a plan for the way that you're going to use credit," Griffin says. "Know why you are [taking on debt], know how you're going to repay it and know when it will be repaid."
You might also want to consider a 0% APR credit card (like the ones below) if you're anticipating big expenses. This way, you can have more than a year to pay off the balance without any interest, plus you may earn rewards for spending along the way.
The Chase Freedom Unlimited® is a no-annual-fee card that earns generous cash-back on everyday purchases and a lucrative welcome bonus. Plus, if you pair it with a premium Chase credit card that allows point transfers, you can convert your cash back into flexible travel rewards.
- Users get a high rewards rate and strong welcome bonus
- Purchases and balance transfers receive an intro APR
- No annual fee
- Has a foreign transaction fee
- Few rewarding ongoing benefits
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- Earn a $200 Bonus after you spend $500 on purchases in your first 3 months from account opening
- Enjoy 5% cash back on travel purchased through Chase TravelSM, our premier rewards program that lets you redeem rewards for cash back, travel, gift cards and more; 3% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery service, and 1.5% on all other purchases.
- No minimum to redeem for cash back. You can use points to redeem for cash through an account statement credit or an electronic deposit into an eligible Chase account located in the United States!
- Enjoy 0% Intro APR for 15 months from account opening on purchases and balance transfers, then a variable APR of 18.24% - 27.74%.
- No annual fee – You won't have to pay an annual fee for all the great features that come with your Freedom Unlimited® card
- Keep tabs on your credit health, Chase Credit Journey helps you monitor your credit with free access to your latest score, alerts, and more.
- Member FDIC
Balance transfer fee
Intro fee of either $5 or 3% of the amount of each transfer, whichever is greater, in the first 60 days. After that, either $5 or 5% of the amount of each transfer, whichever is greater.
Foreign transaction fee
3% of each transaction in U.S. dollars
The Blue Cash Preferred® Card from American Express is a low-fee card with generous cash-back rewards and useful ongoing benefits, such as a monthly Disney Bundle credit. (Enrollment required for select benefits mentioned)
- High cash-back earnings for U.S. supermarkets and streaming services
- Intro-APR offer for purchases and balance transfers
- No annual fee for the first year
- It's less rewarding after the first year because of the annual fee
- Bonus rewards for U.S. supermarkets are capped
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- Apply and find out your welcome offer. As High As $300 cash back* after you spend $3,000 in purchases on your new Card within the first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply, and if approved: 1. Find out your offer amount 2. Accept the Card with your offer 3. Spend $3,000 in 6 months 4. Receive the cash back. *Cash back is received in the form of Reward Dollars that can be redeemed for a statement credit or at Amazon.com checkout.
- $0 intro annual fee for the first year, then $95.
- Enjoy 0% intro APR on purchases and balance transfers for 12 months from the date of account opening. After that, your APR will be a variable APR of 19.49%-28.49%.
- Plan It®: Buy now, pay later with Plan It. Split purchases of $100 or more into equal monthly installments with a fixed fee so you don't have the pressure of paying all at once. Simply select the purchase in your online account or the American Express® App to see your plan options. Plus, you'll still earn rewards on purchases the way you usually do.
- Earn 6% cash back at U.S. supermarkets on up to $6,000 per year in eligible purchases (then 1%), 6% cash back on select U.S. streaming subscriptions, 3% cash back at eligible U.S. gas stations and on transit (including taxis/rideshare, parking, tolls, trains, buses and more) purchases and 1% cash back on other purchases. Cash Back is received in the form of Reward Dollars that can be redeemed as a statement credit and at Amazon.com checkout.
- Get up to a $10 monthly statement credit after using your enrolled Blue Cash Preferred® Card for a subscription purchase, including a bundle subscription purchase, at DisneyPlus.com, Hulu.com, or Stream.ESPN.com U.S. websites. Subject to auto-renewal.
- Terms Apply.
- See Rates & Fees
Balance transfer fee
Either $5 or 3% of the amount of each transfer, whichever is greater.
Foreign transaction fee
2.7% of each transaction after conversion to US dollars
Whichever card you choose to use, evaluate your budget and decide how much you'll be paying down your debt each month, as well as when your last payment will be. That way you won't carry any debt past the 0% APR period, which would force you to pay hefty interest charges. "You can't really have a plan for repaying debt if you don't have an end date," Griffin says.
Bottom line
While an economic downturn may be a stressful time and affect your financial circumstances, your credit doesn't have to take a hit. To recession-proof your credit, start by reviewing what's already happening in your credit reports. Then continue to work on your savings and try to avoid carrying debt unless you have a solid plan for paying it off.
"If you're doing those things, I think by and large, you'll be okay in the long run," says Griffin.
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For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
