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Credit Monitoring

Take these 4 steps to recession-proof your credit

A recession could mean long-lasting trouble for your credit score. Here's how to protect it.

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Zamrznutitonovi | Istock | Getty Images

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®

On IdentityForce®'s secure site.
  • 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 LendingClub High-Yield Savings account. That way your emergency savings can earn you more money in interest payments than it would otherwise.

LendingClub High-Yield Savings

LendingClub Bank, N.A., Member FDIC
  • Annual Percentage Yield (APY)

    5.00%

  • Minimum balance

    No minimum balance requirement after $100.00 to open the account

  • 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:

Wells Fargo Reflect® Card

On Wells Fargo's secure site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.

  • Regular APR

    18.24%, 24.74%, or 29.99% Variable APR

  • Balance transfer fee

    5%, min: $5

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees. Terms apply.

Citi® Diamond Preferred® Card

On Citi's Secure Site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

    18.24% - 28.99% variable

  • Balance transfer fee

    5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees.Terms apply.

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.

Chase Freedom Unlimited®

On Chase's Secure site
  • Rewards

    Enjoy 4.5% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery services, 6.5% cash back on travel purchased through Chase Travel, our premier rewards program that lets you redeem rewards for cash back, travel, gift cards and more; and 3% cash back on all other purchases (on up to $20,000 spent in the first year). After your first year or $20,000 spent, enjoy 5% cash back on travel purchased through Chase Travel, 3% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery service, and unlimited 1.5% cash back on all other purchases.

  • Welcome bonus

    INTRO OFFER: Earn an additional 1.5% cash back on everything you buy (on up to $20,000 spent in the first year) - worth up to $300 cash back!

  • Annual fee

    $0

  • Intro APR

    0% for the first 15 months from account opening on purchases and balance transfers

  • Regular APR

    20.49% - 29.24% variable

  • Balance transfer fee

    Intro fee of either $5 or 3% of the amount of each transfer, whichever is greater, on transfers made within 60 days of account opening. 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

  • Credit needed

    Excellent/Good

  • Member FDIC. Terms apply.

Pros

  • No annual fee
  • Rewards can be transferred to a Chase Ultimate Rewards card
  • Generous welcome bonus

Cons

  • 3% fee charged on foreign transactions

Blue Cash Preferred® Card from American Express

On the American Express secure site
  • Rewards

    6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%), 6% cash back on select U.S. streaming subscriptions, 3% cash back at U.S. gas stations, 3% cash back on transit (including taxis/rideshare, parking, tolls, trains, buses and more) 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 or at Amazon.com checkout.

  • Welcome bonus

    Earn a $250 statement credit after you spend $3,000 in purchases on your new card within the first 6 months. 

  • Annual fee

    $0 intro annual fee for the first year, then $95.

  • Intro APR

    0% for 12 months on purchases from the date of account opening

  • Regular APR

    19.24% - 29.99% variable. Variable APRs will not exceed 29.99%.

  • Balance transfer fee

    Either $5 or 3% of the amount of each transfer, whichever is greater.

  • Foreign transaction fee

    2.7%

  • Credit needed

    Excellent/Good

See rates and fees, terms apply.

Pros

  • High 6% cash back at U.S. supermarket spending (up to $6,000 a year, then 1%)
  • Unlimited 6% cash back on select U.S. streaming subscriptions
  • Unlimited 3% cash back at U.S. gas stations and on transit

Cons

  • 2.7% fee on purchases made abroad
  • Estimated rewards earned after 1 year: $679
  • Estimated rewards earned after 5 years: $2,397

Rewards totals incorporate the cash back earned from the welcome bonus

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.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

For rates and fees of the Blue Cash Preferred® Card from American Express, click here.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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