How to Manage Credit Card Debt in a Possible Recession

The US economy has grown steadily over the past 10 years, but job losses and rising interest rates could lead to a recession in 2023.

It is important to be prepared for any financial contingency and manage your credit card debt accordingly.

There are many different strategies to prepare for a recession and pay off your credit card debt before it hits, such as the popular avalanche and snowball methods and balance transfers. In addition, tactics such as debt consolidation and the creation of an emergency fund can help you be prepared in the event of a job loss.

Read on to find out how you can stay financially secure during a recession.

Is the US Heading for a Recession in 2023?

Eric Rosengren, former president of the Boston Federal Reserve, said in November that the US could face a slight recession in 2023 as the Fed continues to raise interest rates amid persistent inflation. And global think tank The Conference Board predicted in December that the U.S. would enter a “short-term and relatively mild” recession starting at the end of the year and lasting through the third quarter of 2023.

While the US economy has been largely on the rise over the past decade, a potential recession could affect consumers’ ability to repay their debts, especially in the event of significant job cuts. Hence, it is important to be prepared during times of economic uncertainty.

Prepare your finances now

So how do you prepare your finances for a recession? Here’s what you can do to prepare yourself now:

• Take a good look at your current financial situation. Find out how much debt you owe, how much you’ve saved and what you’re spending each month.
• Make a budget so you can cut your costs and not dig yourself into a financial hole. This is especially important if you already have credit card debt.
• Create a savings plan. If you’re not yet saving some of your income for a rainy day, now is the time to start.
• Pay off credit card debt. There are several ways to minimize the amount you owe on a credit card, as we’ll cover in the next section.

Paying off credit card debt before the recession

If you have a lot of credit card debt, it may seem impossible to pay it off before a recession, especially when annual interest rates hit all-time highs. But there are a few strategies you can use to cut down on your debt and pay less in interest.

Avalanche or snowball methods

One strategy to make paying off debt less difficult is the avalanche method, in which you focus on paying off the debt with the highest interest rate as quickly as possible first. Conversely, you can use the snowball method, which prioritizes debts with the smallest balances first.

Apply for a debt consolidation loan

A debt consolidation loan allows you to combine multiple debts into one payment. You may be able to achieve this by getting a debt consolidation loan with a lower interest rate and a longer repayment period. Consolidating your debt can help reduce the total interest you pay over the life of the debt.

Transfer your balance to a new credit card

If you have a credit card with a large balance, another solution is to transfer the debt to a new card with a 0 percent annual lead-in period. A balance transfer card can give you up to 21 months to pay off your debt without interest. Please note that there is usually a fee of 3 to 5 percent and you will likely need a good to excellent loan to qualify.

Ask for a lower interest rate

If you are unable to qualify for a balance transfer card, consider contacting your card issuer and requesting a lower interest rate. Credit card companies often work with customers who are looking for lower interest rates, although this is not a guarantee. Even a small reduction in your card’s APR can save you tons of interest over time.

Should you pay off debt or save money?

You don’t have to choose one or the other. You can either pay off your debt or save money. If your debt is too high, you can use the strategies above to pay off your debt. Once most of your debt is paid off, you can focus on saving for long-term goals. It’s always a good idea to pay off your debt before you start saving, but there are exceptions. For example, one exception is savings for retirement. It is important to take advantage of any employer match through a tax credit account such as a 401(k). Matching money is essentially free money, so it’s a good idea to save up at least enough to get a full match, even if you’re still working to pay off your debt.

It is also critical to set up an emergency fund with the equivalent of three to six months’ wages, especially with a possible recession on the horizon. If you can’t save enough to have three to six months’ worth, just try to save as much as you can. Even if it’s a small fraction of your salary, any amount saved is better than nothing. Your emergency fund should be used to cover emergency medical expenses, home repairs, and car repairs.

You can also create a budget using the 50/30/20 method. This means that 50 percent of your paycheck goes to your needs, 30 percent to your wants, and 20 percent to your savings and paying off debt. There are times when you need to cut expenses in order to pay off your debts. But once your debts are paid in full, you can start increasing your discretionary spending.

bottom line

It’s important to get your finances ready, including paying off your credit card debt, before a recession kicks in. It’s not uncommon for consumers to accumulate credit card debt during a recession, so eliminating this debt early can help you manage your finances better.

There are various ways to pay off credit card debt, including debt consolidation and the avalanche method. And a balance transfer card can help you pay off your debt without paying interest, depending on how much debt you have.

Whichever method you choose, it is important to prepare now. Review your finances and take all necessary measures to better prepare for a possible downturn.

CreditCards.com Team This article was created using automation technology and carefully edited and reviewed by our editorial staff.