Experts say the U.S. could be headed for a recession in 2023. If you have credit card debt, it’s important to pay it down as much as possible and take other steps to prepare your finances.
The U.S. economy has been growing steadily for the past 10 years, but job losses and increased 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 down credit card debt before it hits, such as the popular avalanche and snowball methods and balance transfers. Additionally, tactics such as debt consolidation and creating an emergency fund can help you be ready in the event of a job loss.
Read on to find out how you can ensure your financial security in a recession.
Is the U.S. headed for a recession in 2023?
Eric Rosengren, ex-president of the Boston Federal Reserve, said in November that the U.S. may face a slight recession in 2023 as the Fed continues to hike interest rates amid persistent inflation. And global think tank The Conference Board, in December projected that the U.S. will experience a “brief and relatively mild” recession beginning at the turn of the year and lasting through the third quarter of 2023.
Despite the fact that the U.S. economy has mostly been on an upward trajectory for the past decade, a potential recession can affect consumers’ ability to repay their debts, particularly if there are significant job losses. Hence, it is important to be prepared during a time of economic uncertainty.
Prepare your finances now
So, how do you prepare your finances before a recession? Here’s what you can do to prepare yourself now:
- Take a hard look at your current financial situation. Find out how much debt you owe, how much you have saved and what you’re spending each month.
- Draw up a budget so that you can keep your spending down and not dig yourself into a financial hole. This is especially important if you’re already carrying credit card debt.
- Create a savings plan. If you’re not already setting aside a portion of your income for a rainy day, it’s a great time to start.
- Pay down credit card debt. There are several ways to minimize the amount you owe on credit cards, as we’ll outline in the section to follow.
Paying off credit card debt ahead of a recession
If you have a lot of credit card debt, it may seem impossible to pay it off before a recession, particularly as APRs reach all-time highs. But there are a few strategies you can employ to chip away at your debt and pay less in interest charges.
The avalanche or snowball methods
One strategy to make paying down debt seem less overwhelming is the avalanche method, where you focus on paying off the debt with the highest interest rate first, as quickly as possible. Conversely, you could use the snowball method, which prioritizes debts with the lowest 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 obtaining a debt consolidation loan with a lower interest rate and longer repayment term. Consolidating your debt can help reduce the total amount of 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 introductory APR period. A balance transfer card can give you up to 21 months to pay off your debt interest-free. Note that there’s usually a 3 percent to 5 percent fee involved, and you’ll likely need good-to-excellent credit to qualify.
Ask for a lower interest rate
If you can’t qualify for a balance transfer card, consider contacting your card issuer and asking for a lower interest rate. Credit card companies will often work with customers seeking lower APRs, though it’s not a guarantee. Even a small drop in your card’s APR can save you a bundle in interest charges over time.
Should you pay off debt or save?
You don’t have to choose one or the other. You can both eliminate debt and save. If your debt is overwhelming, you can use the strategies discussed above to eliminate your debt. Once the majority of your debt is eliminated, you can focus on saving for long-term goals. It’s always recommended to pay your debt off before you start saving, but there are exceptions. For example, one exception is saving for retirement. It’s important to take advantage of any employer match through a tax-advantaged account, such as a 401(k). The matching money is essentially free money, so it’s recommended to save at least enough to receive the full match, even while you are still working to pay off your debt.
It’s also critical to create an emergency fund with the equivalent of three to six months’ of take-home pay, particularly with a possible recession on the horizon. If you can’t save enough to have three to six months’ worth, just try to sock away as much as you can. Even if it’s a small portion of your paycheck, any amount saved is better than none. Your emergency fund should be used to cover unexpected medical expenses, home repairs and car repairs.
You can also create a budget using the 50/30/20 method. This involves putting 50 percent of your take-home pay toward your needs, 30 percent toward your wants and 20 percent toward your savings and debt repayment. There may be times where you need to cut back on your expenses to pay off your debts. But once your debts are fully paid, you can begin to increase your discretionary spending.
It’s important to prepare your finances, including paying down your credit card debt, before a recession hits. It’s not uncommon for consumers to rack up credit card debt during a recession, so eliminating this debt beforehand can help you better manage your finances.
There are various ways to pay down credit card debt, including debt consolidation and the avalanche method. And a balance transfer card can help you eliminate debt without paying interest, depending on how much debt you have.
Whatever method you choose, it’s important to prepare now. Review your finances and take any steps needed to best position yourself for a possible downturn.