What is the impact of inflation on consumer credit?

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Credit Sesame discusses the impact of inflation on consumer credit.

When inflation strikes, prices for many of your regular purchases climb higher. Your dollars seem to cover less and less. The hard-earned money in your bank account leaves your hands faster than in the past. But what exactly does all of that mean for your credit?

The answers often aren’t obvious, primarily because inflation generally happens slowly over a period of weeks or months. That makes it important to understand the potential effects of inflation so you can take steps now to maintain good credit.

How might inflation impact consumer credit reports and credit scores?

You aren’t likely to see major changes to your credit report or credit score because of inflation alone. However, side effects of inflation could show up with time. For example, if you get behind on payments, spend too much of your available credit or request multiple new credit lines in short succession, your score could fall. On the other hand, if you use inflation as a reason to double down your money management focus and put the right practices to work, you can maintain or even grow your credit score.

We’ll explain how these scenarios might play out below. Be sure to get the free Credit Sesame app to keep tabs on your credit report and score amid inflation.

How could inflation influence consumer credit card use?

During inflation, the Federal Reserve often chooses to increase interest rates, as it did several times in 2022. In turn, this can push variable interest rates higher, such as those on your credit cards.

If this happens to your credit card, don’t feel singled out. The Fed is operating on a principle designed to help the overall economy. The idea is that if interest rates rise, people curb their spending because things cost more. As this spending slowdown ripples through the economy, inflation cools and things become more affordable – or so the theory goes. There’s no guarantee of this happening, but it’s helpful to understand that concept when evaluating money management decisions. You will likely see more expensive monthly bills because of higher interest rates. If you do not wish to pay the extra cost created via higher interest rates, you might consider setting a spending “ceiling” on your credit card and stop using it once your balance reaches a certain level. For example, let’s say you typically set aside $250 a month to pay your credit card in full. To anticipate inflation, you might limit yourself to spending $225 a month and assume that the final bill will end up closer to $250, factoring in higher interest rates with inflation.

How can inflation affect my loans, such as a car loan, student loan or mortgage?

Your variable-rate loans may cost you more when it’s time to make monthly payments.

The principles you’re using to manage your credit card expenses apply here. Make a plan that applies to all types of debt you hold. This ensures you have an accurate and updated picture of total monthly debt payments, including those higher interest amounts. Following these steps can help you make a plan:

  1. Log into the apps or websites you use for your banking and credit accounts.
  2. Check out recent monthly statements or balances to get a sense of how much more you’re paying monthly today than, say, three to six months ago.
  3. Update your personal budget to factor in these higher payments resulting from inflation.
  4. Evaluate any changes you might need to make to ensure you’re covering your debts fully each month.

The best money managers first seek out the facts about their financial health and then plan to avoid surprises. It might feel a little scary to know exactly how much more you must pay, but you’ll have greater peace of mind and send every dollar right where you need it to weather inflation.

What easy steps can I take to reduce the risk of inflation hurting my credit?

The best strategy for helping your credit during inflation is to keep doing the right things to build credit. This includes making your monthly payments on time. When possible, pay your credit card balance in full. Manage multiple types of credit. Use a portion of the credit available, but not all of it.

Download the free Credit Sesame app to get to know your credit report and your credit score better. Make sure everything on your report is accurate. File a dispute if you see an error to ensure correct information is available to prospective lenders and landlords.

What other information can help me manage my credit during inflation?

Several free online resources can help you understand inflation better. Among them are:

  • Inflation Monitor from the Bipartisan Policy Center. This fun tool provides quick and easy-to-understand updates about price changes for food, fuel and other things you buy. See if it matches up to your experiences in your local area. Also use it to spot trends and time your shopping trips, such as knowing when fuel prices are falling so you can gas up and save a little money.
  • Consumer Price Index from the U.S. Bureau of Labor Statistics. You’ll find charts, bullet-point explainers and other details to help you monitor what inflation is doing to your wallet.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Nate Birt
Nate Birt is a personal finance writer with 15 years of experience as a journalist, business leader, and social impact executive. His company, Silver Maple Strategies, helps clients unlock the power of persuasive storytelling to capture imaginations and secure investment.

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