Today, it’s nearly impossible to get through life without a form of credit. And for many people, that’s not a bad thing. However, it can be a destructive thing if used improperly, so it’s always important to be mindful of how credit decisions can affect you. Every time you apply for a credit card or take out a loan, make sure you are doing everything you can to stay on the bank’s good side, or it can come back to bite you. Many future decisions in life are based on how you handle these responsibilities.

Why credit is your friend

Credit opens up doors to many opportunities that would otherwise be unavailable to you. The ability to get a college degree and own your own home is incredibly difficult without any money. Even as early as 18, you can start building credit. When managed well, this access can open up many doors, like owning a home or getting a degree. In this case, having the ability to take out a loan is great and can make many things that felt like they were out of reach, affordable. Many credit cards also give cash back rewards on everyday purchases. If you keep your balance low on these cards and don’t accumulate interest, it’s basically free money. Just remember not to carry a balance month to month and rack up interest.

How it can be your foe

Credit is fun to have, but dangerous when misused. If you end up taking out too much debt and carrying high balances on cards, you can get stuck in a cycle of debt. If this becomes the case, it’s not too long before credit becomes your enemy. Once your score is hurt, it also becomes hard to get it back up. Many negative actions will stay on a report for years, keeping your score low. With a low score, you lose access to good interest rates. Having high-interest rates will increase your risk of defaulting and keep you buried. It could even prevent you from owning a home because no company will want to take a risk on you. You could end up waiting even longer to achieve your goals if you mismanage your credit.

How to build your credit score

Many different factors go into forming your credit score, like how much of your available spending limit you use and if your payments are made on time. By knowing what factors will affect your score, you can learn to maximize it. The best way to keep your credit score as high as possible is to always make payments on time, keep your card’s balance low, and diversify the types of credit you use.

Having a good credit score while having student loans can be difficult. That’s why Defynance offers an income share agreement that has the ability to eliminate your student loan debt. An income share agreement allows you to pay only what you can afford, leaving you the freedom to live your life. Payments in these agreements are flexible and always affordable. They are interest-free and also protect you by preventing you from making payments if your income is below $25,000 a year.

Rising interest rates, skyrocketing gas prices, turbulent markets, and inflation at a 40-year high are multiple key indicators foreshadowing a potential recession.  Some are going further by stating, “There’s no question in my mind that we’re in a recession. Maybe the economic and technical definitions of a recession haven’t hit yet but we’re there” says Howard Dvorkin, Chairman of Debt.com and personal finance guide. 

Whether we are in a recession, or it is impending, or perhaps, we avoid it altogether, it is always prudent to plan for the worst and hope for the best.  Let’s discuss how to plan a budget for any economic condition.  Increasing your savings, re-evaluating investments, and managing debts are key opportunities to get ahead of any unexpected events. However, it is also important to avoid making decisions based on recessionary fears which can worsen your financial standing in the long run.  Here are a few tips you can consider to hopefully minimize the impact of a recession: 

Save More  

As a rule of thumb, a percentage of your paycheck should go towards your savings. But now is the time to increase this percentage by cutting down on unnecessary expenses. You may want to delay that vacation you were planning or keep those home renovations on hold until absolutely necessary. Also, make sure that these savings are liquid and can be accessed in a time of need.  Which means don’t invest or hold these funds in a way where access to them is restricted, like in a CD (Certificate of Deposit), for example. 

Pay Off Debt 

With rising interest rates, make it a priority to get rid of non-mortgage debt, with a special emphasis on debt with variable interstate rates that are likely to rise as the Fed continues raising interest rates. Focus on contributing more of your income to debt that holds the highest interest rates.  For example, credit cards already have notoriously high-interest rates, but as the Federal Reserve continues to raise rates, carrying a balance will become even more costly. Another point to remember is that you should consider paying off debt that has tax-deductible benefits, like educational loans.  For other debt reduction strategies, see our previous blog titled, How To Tackle Debt Effectively. 

Emergency Fund 

Apart from savings, build your emergency fund for a rainy recession day. Ideally, 20 percent of your income should go to your savings, and 30 percent to extra expenses like your subscriptions and memberships. After slimming down your extra expenses, set up higher automatic payments to your emergency fund. This fund can also come in handy in case of job loss with a goal to keep you going for at least 6 months without a paycheck. 

Become the Employee Your Next Job Needs 

If you start seeing a wave of layoffs in the news and get a sense that they may soon be coming to your company, get a step ahead by upskilling and updating your resume.  Remember that individuals with higher experience drawing handsome salaries are more under threat than their younger counterparts who represent lower overhead for the company. There is a wide variety of upskilling resources available on the Internet.  Here are some examples of resources you can investigate. But whatever you choose, start as soon as possible. 

Reassess Your Investment Portfolio 

Considering the volatility of the current stock market, you may want to consider diverting more of your funds towards investments with the least risk despite a lower rate of return. If you have enough cash on hand to cover six months or more, start looking further into the future and use today’s economic conditions to your long-term advantage. It might be time to consider investing at a discount today since markets are coming down. 

Another strategy is to invest in passive income, which can be used to augment savings, as a rainy-day fund, and for long-term retirement income.  Here at Defynance, we have launched a passive income fund that is projected to offer low volatility, like fixed income but with higher returns like with equities.  Learn more at our Fund website. 

While no one can accurately predict how future economic events unfold, the above strategies can certainly give you a fighting chance to face and overcome the approaching recession.