How Can Inflation Affect Your Credit?

| Tedis Baboumian |

With rising costs everywhere that you look, inflation is probably on your mind. The term inflation refers to the rate at which prices and services rise over a period of time, which results in decreased purchasing power. As prices rise, it costs more to buy food, fuel, clothing, and household goods, as well as electricity and healthcare services. How does inflation affect your credit?

Inflation and Interest Rates

Inflation doesn’t directly affect your credit, but it may impact your finances. One example is the increased cost of borrowing money. To control rising inflation, the Federal Reserve has been raising the federal funds rate, which is the rate banks charge each other to borrow money. Changes in the federal funds rate lead to changes in the prime rate, which typically affects the interest rate you’re paying on any credit card balance.

If you’re having difficulty making ends meet because of rising prices, a higher interest rate on your credit cards doesn’t help matters. If you’re carrying a balance on one or more credit cards, a higher interest rate means you may probably have a higher payment due. It also means it’s likely to take longer to pay back the money you owe.

Your Credit Score

Your credit score is based on a combination of factors. The largest factor is your history of making payments on time. If rising costs and interest rates make it difficult for you to pay your bills and you miss a payment on a loan or credit card, it can quickly bring down your credit score. Any payment that is 30 days or more late shows on your credit report for seven years.

Another factor that affects your credit score is your credit utilization. This is the percent of available credit you use on credit cards or any other revolving account. Keeping your credit utilization under 30 percent of your available credit can have a positive impact on your credit score. If you end up using credit cards to pay bills because you’re having difficulty making ends meet, higher credit utilization can have a negative effect on your credit score.

Protecting Your Credit as Inflation Rises

If inflation is affecting your financial picture, it’s a good idea to take steps to protect your credit and your finances. Rather than relying on credit cards to cover regular expenses, consider how you can cut expenses or pick up a side hustle. Avoid making major purchases during this time. Be careful to pay all your bills on time.

Your credit score is calculated based on information in your credit report so it’s important to check your credit report at least annually to make sure all the information on it is accurate. Errors on your credit report such as incorrect payment history or incorrect balances can affect your credit score. Dovly is an AI credit engine that can help you dispute any errors you find on your credit report. Try it risk-free with our free membership tier. Get in touch with Dovly today.

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