Credit Building

Credit scores and inflation: Protect your credit score

Nov 16, 2023

It’s a turbulent time for our personal finances, with rising inflation and a cost of living crisis. So, whether you’re worried about how inflation rates impact your credit score and credit cards, or if you're wondering if credit unions are safer than banks during a recession, Loqbox will try to shed light on these issues. 

What is inflation?

Simply put, ‘inflation’ is the increase in the price of goods and services over time. Sometimes, inflation can soar beyond our pay rises, and if the goods and services impacted by rising inflation include bare essentials that we use in our daily lives (eggs, bread, milk, toilet paper, etc.), we can find ourselves priced out of the simple things that we all need.

Inflation tends to happen when there is an increased demand for goods – if everyone were to suddenly have a pay rise around the same time, there’d be a lot more cash in the economy to spend, but the number of goods available is still the same. This high demand causes the prices to rise and this essentially causes inflation to rise.

However, a low and stable inflation rate helps maintain a healthy economy. When inflation rises, the banks will tend to raise interest rates to discourage spending and hopefully bring prices back down.

What is the link between credit and inflation?

There’s no direct impact of inflation on credit scores. Your credit score is a reflection of your credit report, including how you have managed credit in the past. Your credit report doesn’t hold information about current inflation rates or other economic situations. But a steady rise in prices over time can still have a subtle (and sometimes significant) effect on your credit score. 

Credit cards, inflation, and your credit score

As prices go up because of inflation, your buying power may go down. This can lead to increased reliance on credit cards to cover your everyday expenses. 

In turn, this could mean that you find yourself with a higher amount of credit card debt. While using credit cards responsibly can benefit your credit scores, misusing them will have the opposite effect.

It’s important to know that if you turn to your credit card for help during times of economic uncertainty, you must still be able to afford your minimum payments, if not more. Not being able to manage your credit card debt during recessions could harm your credit score. If you’d like to understand more about missing payments and their effect on your credit score, read more about that here.

Does inflation affect credit scores?

So, how do credit card interest rates go up with inflation? In most cases, credit card interest rates are not directly tied to inflation. However, when the Bank of England raises the base rate to combat inflation, credit card companies may increase their interest rates as well. It's important to stay informed about changes to your interest rates and manage your credit card balances accordingly.

Inflation and credit risk

Inflation can contribute to economic instability, increasing the likelihood of a recession. During such times, credit risk becomes a concern. Lenders may become more stringent with their lending criteria, making it essential to maintain a good credit score to access credit when needed.

Are credit unions safer than banks during a recession?

During economic downturns, people often question the safety and stability of financial institutions like traditional banks. Credit unions, “non-profits” known for their community-oriented approach to borrowing and low-interest rates that maintain regardless of the economy, may seem like a safer option compared to traditional banks during these times.

Credit unions have historically performed marginally better than traditional banks during recessions. However, some online banks have been able to match credit unions in terms of interest rates offered to savers. Choosing which is best for you is dependent on your situation, but ensuring your money and interest rates remain as strong as possible is vital in uncertain economic times.

Safeguarding your credit score during inflation and recession

To protect your credit score in the face of inflation and recession, consider these tips:

Create a budget:

A budget is a great way to manage your personal finances. Even if you’ve already made one, when there is a big change in the economic landscape, it’s a good idea to revisit it. You can read about different types of budgeting rules here. You may also want to reconsider which budgeting rules you use to accommodate your new financial circumstances.

Budgets break your income into percentage chunks that help you to portion out money in a functional way. For example, the 50-20-30 rule uses 50% for essential expenses, 20% for financial goals, and 30% for nonessential spending. Organising your money this way will help you to stay on top of your payments and maintain your credit score.

Decrease your spending:

When you’ve worked out your budget, you might find that you need to reduce your spending. The best place to tackle this reduction is from your non-essential expenses

This could include entertainment and luxury items. Sacrificing some of these will ensure that your essential spending and financial goals are not impacted

Get started with Loqbox

If you want to maintain your credit during a recession or period of economic downturn, Loqbox is a simple solution for boosting your credit score.

For £2.50 per week, or £99 for the year, a Full Loqbox membership lets you benefit from all of our fantastic credit-building tools to keep your credit score on track and your financial wellbeing in the forefront of your mind. Our members have seen their scores boost by up to 300 points in the first three months of using all of our tools together.

Improvements to your credit score are not guaranteed.

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