Your credit score is one of the most important numbers in your life. It can determine everything from the interest rate you pay on a mortgage to whether you are approved for a car loan. So it’s important to make sure that your credit score is as high as possible.
But what happens if inflation starts to take its toll? Will that have an impact on your credit score? Let’s take a look.
What Is Inflation?
Inflation is defined as a sustained increase in the general price level of goods and services in an economy. Over time, inflation erodes the purchasing power of money, which means that each dollar you have today buys less than it did a year ago.
The most common causes of inflation are increases in the money supply, which occur when the Federal Reserve prints more money, and demand-pull inflation, which happens when economic growth outstrips the supply of goods and services.
While inflation is often seen as a bad thing, it’s actually a normal and necessary part of a healthy economy.
Without inflation, stagnation can set in, leading to higher unemployment and slower economic growth. That’s why the Federal Reserve aims for a moderate level of inflation, usually around 2%-3% per year.
Does Inflation Affect Credit Score?
Inflation doesn’t have a direct impact on your credit score, but it can indirectly affect it. For example, if you have a fixed-rate mortgage, your monthly payments will stay the same even as inflation increases the cost of living.
However, if you have an adjustable-rate mortgage, your monthly payments could go up if inflation causes interest rates to rise. This could make it harder for you to make your mortgage payments on time, which would in turn decrease your credit score.
Inflation can also affect your credit score indirectly by impacting your ability to pay off your debts. If the cost of living goes up but your income stays the same, you may have a harder time making your monthly debt payments. This could lead to missed payments, which would then lower your credit score.
6 Tips to Protect Your Credit Score From Inflation
Inflation can have a number of different effects on your credit score, both directly and indirectly. However, there are a few things you can do to protect your credit score from the negative impacts of inflation.
Here are 6 tips to help protect your credit scores from inflation:
1- Keep your debt levels low:
One of the best things you can do to protect your credit score from inflation is to keep your debt levels low.
When inflation goes up, the value of your money goes down, and you’ll have to pay back your debts with cheaper dollars. That means that if you have a lot of debt, you’ll be paying it off with cheaper and cheaper dollars, and your debt will be worth more and more in real terms.
So it’s important to keep your debt levels low so that you’re not overburdened when inflation hits.
2- Diversify investments:
Another way to protect your credit score from inflation is to diversify investments. That way, if the value of one investment goes down because of inflation, you’ll still have other investments that are doing well.
Diversifying your investments will help to keep your overall financial health strong and will make it easier for you to weather any short-term effects of inflation.
3- Maintain employment:
If you can, it’s also a good idea to try and maintain employment during periods of inflation. That way, you’ll have a steady income that will help you to make your monthly debt payments on time. This will also help protect your credit score from any indirect effects of inflation.
4- Transfer high-interest credit card debt:
If you have high-interest credit card debt, you may want to consider transferring it to a low-interest account. This will help you to keep your monthly payments manageable and will protect your credit score from any negative impacts of inflation.
You may also find some credit card companies that offer special deals for balance transfers during periods of high inflation. So shop around and see what’s available.
5- Keep an emergency fund:
Another tip to protect your credit score from inflation is to keep an emergency fund. This will help you to cover any unexpected expenses that come up and will prevent you from having to put them on a credit card and rack up debt.
An emergency fund will also help you to weather any short-term effects of inflation, such as higher prices for goods and services.
6- Monitor your credit report:
Finally, it’s important to monitor your credit report for any changes that could be caused by inflation.
If you see any discrepancies, you can dispute them with the credit bureau. This will help to keep your credit score accurate and will prevent any negative impacts of inflation from affecting your credit score in the long term.
By keeping an eye on your credit report, you can help to ensure that your credit score stays as high as possible, even in times of inflation.
Final Thoughts
Inflation can indirectly affect your credit score, but there are things you can do to protect it. It’s important to keep your debt levels low, diversify investments, and maintain employment during periods of inflation.
You should also transfer high-interest credit card debt to a low-interest account and monitor your credit report for any changes that could be caused by inflation. By taking these steps, you can help to ensure that your credit score stays as high as possible.
