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Inflation has received a lot of attention in recent months.
As a consumer, you have probably felt a pinch in your wallet. Many things have become more expensive.
Aside from the cost of things, inflation has caused many people to worry about their credit. However, it is essential to note that although inflation does not have a direct effect on credit scores, it can have an indirect effect.
This article will explain how inflation affects credit and everything you need to understand.
What is inflation?
Simply put, inflation occurs when spending on goods and services increases over time.
When high inflation suddenly increases while people's income remains stable or increases slightly, it can lead to financial difficulties. This can have a significant impact on people if the cost of important and frequently used household items increases.
The federal government monitors inflation using statistical measures known as consumer price index (CPI).
The CPI tracks prices of consumer goods and services and separates measures of energy and food costs. While many experts believe that inflation is only temporary and not a cause for concern, many people are concerned.
How does inflation affect your credit?
Inflation has no direct impact on your credit report or credit score. Yet significant changes in the value of the dollar can create situations that harm your credit and limit your ability to borrow money.
This is how it could happen –
Late payments on credit cards
During inflation, necessities such as groceries and gasoline increase dramatically. If you get to the point where you have to choose between grocery shopping and paying your credit card bills, you'll probably choose grocery shopping. Because you spend more money to buy it, you will have less to pay your bills.
When this happens and you make late or missed payments; therefore, it can harm your credit.
The increase in the credit utilization rate
Because inflation increases the cost of goods and services, many people rely on their credit cards to cover their expenses. Higher credit card balances and usage can impact your credit score, as these factors account for up to 30% of your FICO Score.
According to Consumer Financial Protection Bureau, maintaining a lower credit utilization rate, preferably below 30%, demonstrates to lenders that you are a responsible borrower. Lenders prefer lower balances because they are more likely to be repaid.
Excessive use of your credit card increases your debt, and paying it with a high interest rate leaves you with less money in your pocket, making it even more difficult to survive in an inflationary environment.
Remember, credit utilization rate and late payments are two important factors when it comes to credit scoring, so make your decisions accordingly.
How to manage your finances during inflation?
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 inflation:
Try Selling Additional Items
There is a seller's market for various expensive assets when prices rise due to inflation. So if you want to sell an additional asset, like a car or vacation home, market demand and inflation can help you get a reasonable price.
However, make sure you only sell items that you no longer need and will not need to be replaced. This will cause inflation to work against you as a buyer.
Distribute your balances
Many people have to pay off their credit cards during inflation because they have less money. If you're one of them and don't want your credit score to suffer, you can spread your balances across your other credit cards.
Total credit usage influences the credit score, but the amount of usage of each credit card also matters. Simply put, if your overall credit utilization is lower, but one of your cards is almost maxed out, 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 below 30%, which will improve your credit score.
Become an authorized user
If you know people with good credit, you can ask them to include you as an authorized user on their account. The card's history will then appear on your report and you will not be required to repay any account fees. This will immediately and significantly increase your credit score.
There are a few things you need to remember if you choose this route. It is difficult to find someone to add you to their account because they will be legally responsible for all charges. You will suffer the consequences if they stop paying off their cards or take on significant debt. Make sure you only speak to someone you can trust.
Consolidate your debts
Debt consolidation combines multiple debts, usually high-interest debts like credit card bills, into one payment.
Debt consolidation is a good option for people in difficulty because you can get a lower interest rate. This will help you reduce your total debt and reorganize it so you can pay it off faster. If you make the payments and don't accumulate more debt, your credit score will increase over time.
Before doing so, consult a certified professional and ask for their help in determining the best debt consolidation service provider for you.
Conclusion
Inflation, as in the past, can harm credit scores. It is essential to cut down on all unnecessary expenses and plan your way through this difficult time. Keeping in mind all of the detrimental effects of inflation on your credit and acting accordingly can significantly help protect you and your credit from inflation.
About the Author:
Lyle Solomon has extensive legal experience, in-depth knowledge and experience in consumer credit and drafting. He has been a member of the State Bar of California since 2003. He graduated from the McGeorge School of Law at the University of the Pacific in Sacramento, California in 1998 and currently works for the Oak View Law Group in California as lead attorney.
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