What Recession Means to Your Credit Report
Lenders Are More Likely to Scrutinize Your Credit Report and Scores
When you hear experts saying the country is in a recession, it may sound vague. Certain rates of economic growth across various fiscal "quarters" really provide more of an economic snapshot than a true crystal ball. However, one thing is generally true: A recession affects your ability to get credit from lenders. As a result, many people, from all walks of life, are looking at how they can keep themselves out of an economic tailspin by maintaining a good credit score in tough times.
In a recession environment, what ends up happening is much like the proverbial "bull vs. bear" scenario. In good economic times, the growth of wealth attracts investors. Lenders become "heady," spreading wealth around and practicing relatively liberal lending policies.
The opposite is often true for credit in recession. Like a "bear" market, wherein investors "hibernate," lenders of all varieties cut back on their activities, becoming more cautious and withdrawing from the markets and general investment.
What this means for consumer credit in a recession is that lenders may get more cautious about lending money to them. According to the credit history of the loan applicant, this is, basically, its own kind of investment. Lending is an investment into future returns, and when and if those future returns start to look less likely, lenders shutter their doors.
This is where an individual's average credit score enters the picture. The first to be "frozen out" of lending in a recession will be those with the worst credit. Consequently, the freeze will generally creep up the ladder, hitting the best credit holders last. So, in a recession, having that sparkling credit score becomes ever more important and can be the difference between closing a deal and getting left out in the cold. This can apply to all types of lending, including auto loans, mortgages, and more.
Therefore, during a recession, helping yourself to money-making opportunities or even needed loans has to do with working your credit rating to your advantage. First, you'll need to check your credit and see where you are. Then, you'll need to optimize your credit opportunities with activities that do no harm to your credit score or rating.
Recessions weaken the general economic climate, but if you can continue to pay your bills on time and maintain other strong money-management habits, you can ride out the economic downturn with a solid credit history intact.
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