How to Survive a Recession and
Protect Your Credit
Do you have what it takes to survive a recession? Unless you live in a cave, it's hard to ignore the current economic conditions in the United States. Falling stock prices, high unemployment rates, increasing foreclosures and bankruptcies, and the crash of the top banks has rocked the US economy. Even with the stimulus package, it appears that things are going to get tight.
Analysts are predicting this recession will be longer and affect more people than any financial crisis since the Great Depression. My grandmother lived through the Great Depression and had first-hand experience surviving the tough times. Hoping to make my life easier, she passed down the lessons she learned on how to make it through unsettled times. The main lesson was to:
Hope for the Best but Prepare for the Worst
The essence of her teachings was to reduce your spending and increase your savings so you can weather a tight economy. Expanding on this concept, the following strategies have been proven through time to help people survive a recession:
Protect Your Income
Keeping your job should be a top priority during a recession. The unemployment rate is rising everyday due to lay-offs as a result of business restructuring or closures. Don't quit your job just because you can't stand the boss anymore. Instead, put in extra hours if possible and work a little harder to make yourself a needed player at work. The last thing you want is to be looking for a job when everyone else is.
Be Prepared for Losing Your Job
While you should do everything you can to keep your job, layoffs can still happen. No matter how secure you think your job is, be ready just in case you lose it. This means updating your resume, networking with friends and colleagues about job opportunities, and having a list of possible jobs that you could apply for. You might also consider taking on a part-time job just in case you lose your primary income.
Build an Emergency Fund
Since most people live paycheck to paycheck, not having a source of income for even a month can mean financial ruin. Financial experts usually advise to have the equivalent of six months income socked away for emergencies. I realize that this amount is hard to conceive for most people, so aim for building a reserve to cover one month's expenses to start with. Once you meet that goal, work on building a two-month reserve. Eventually, you'll have enough savings built up to carry you through if you lose your job. So where do you find the money to build your emergency fund? Read the next tip for some ideas.
Cut Your Spending
The first place to cut your spending is to hold off making those big-ticket purchases. This includes expensive vacations, home remodeling projects, and financing furniture or a new car. In the mean time, maintain your old car, vacation locally, and make due with what you have.
The next place to save money is by cutting your everyday spending. Skip the coffee shop and brew your own at home. Buy non-perishable foods on sale and stockpile them for later use. Carpool with friends and split the gas bill with them. Cook meals at home instead of dining out. Start doing odd jobs yourself instead of paying someone else. This includes mowing your lawn, cleaning or painting your house, and detailing your vehicle. By lowering the amount of money that you spend each month, you'll have more money to sock away in your emergency fund.
Reduce Your Debt
The amount of debt that most people carry has steadily climbed over the years. In economic good times, a high debt load is a bad idea. In a recession, it can mean financial ruin. To help stabilize your situation, you need to work on reducing the amount of money you owe to creditors. You need to stop building new debts and pay more than the monthly minimum on your current debts. Only use your credit cards when necessary, and remember that if you would be reluctant to pay with cash, don't buy it in the first place.
Some people are tempted to get a home equity loan to pay off their credit card debts, but this isn't always a good idea. First of all, you're trading an unsecured debt for a secured debt (and putting your home at stake). If you can't make the equity loan payments, then you stand to lose your house. Secondly, it reduces the amount of equity in your home, something that you will regret later when you decide to sell your house. A better option to reduce your debts is to cut expenses and maintain a budget.
Protect Your Credit
Now is the time to work on protecting your credit. The credit industry is tightening their belts along with the rest of us, and I predict that it will be a lot harder to qualify for credit in the future. These tips will help you make the best of a bad situation:
- Reduce your debt to less than 50% of your credit limit. Creditors are reducing the amount of credit that they are extending, even to their current customers. As a result, you may find your credit limit being reduced at some point in time. If you are close to the limit on one of your cards and the limit gets reduced, you could find yourself over the limit without making any purchase. Not only will this hurt your credit rating, you'll have to pay extra fees and possibly a higher interest rate.
- Pay your bills early. Don't wait until the last minute to pay your bills. Credit card companies report late payments immediately, which can hurt your credit rating. Late payments also trigger extra fees and the dreaded "universal default interest rate". And the last thing you need is to pay even more for your existing debt.
- Don't close out existing credit card accounts. I know it's tempting to close an account that's paid off, but you might think twice before doing so. Closing an account will temporarily reduce your credit score (because it lowers your available credit level and the length of your credit history). Not only will future cards be harder to qualify for, you'll likely face higher interest rates and terms that aren't as favorable. Instead, keep the account open and charge a small purchase on it twice a year to show account activity.
Even though these tips seem old-fashioned, they have stood the test of time. The more solid and debt-free your finances are to being with, the better chance you will be able to survive a recession.
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