Inflation is the term that refers to the rising prices of goods and services over time. As inflation rises, the value of money and consumers’ purchasing power goes down. While you watch prices rise everywhere you look, you may wonder “How does inflation affect your credit?”
Inflation and Your Credit Score
Inflation has no direct impact on your credit report or your credit score. While inflation increases, the things that impact your credit score stay the same. Your credit score is calculated based on information that appears on your credit report such as:
- Payment history
- Total debt and credit utilization
- Credit mix
- The length of your credit history
- New credit and new hard inquiries
Inflation has an impact on many things that may directly affect you, such as the cost of your groceries, but it doesn’t affect your credit score. There’s no automatic change to your credit score just because inflation is rising.
How Inflation Indirectly Affects Your Credit
Even though inflation doesn’t directly affect your credit, it can still have an indirect effect. The interest rate you’re paying on borrowed money may rise. This can lead to higher payments, making it more difficult to make ends meet.
If your wages increase with inflation, you may end up with more money to pay down debt. If that happens, you may actually benefit from inflation.
For many people, wages don’t keep pace with inflation. As prices rise, everyday necessities become more costly and may start to be unaffordable. If you have to choose between buying food or paying a loan or credit card, you may decide you have to buy groceries and can’t pay other bills. Late or missed payments can quickly bring down your credit score.
Another choice you may make is to use credit cards to pay for things you can no longer afford. As your credit card balances and credit utilization climb, your credit score may begin to decrease.
Protecting Your Credit During Inflation
When confronted with rising prices, you may want to carefully consider making major purchases. It’s not a bad idea to postpone taking a trip or buying a car. You may also want to consider picking up a side hustle to increase your income and help you cover expenses. If you can, use the extra money to pay down as much of your debt as possible.
If you have credit cards that have a high interest rate, you may want to apply for a card with an introductory rate of 0% to save money on interest. Or apply for a personal loan to consolidate your debt.
Credit Reporting
It’s important to keep an eye on your credit reports, not only during times of high inflation. Errors on credit reports are surprisingly common. Check that your personal information is correct and that your accounts are reporting with the right balance. Make sure nothing is showing as past due that was paid on time and that all the accounts listed belong to you.
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