With a Recession on the Horizon, the Time to Pay Down Debt is Now

The time to pay down debt is now

The nearly double-digit inflation that ripped through the American economy in spring and summer of 2022 left most financial experts asking a key question: Is a recession next? That’s because the Fed (aka Federal Reserve System, or America’s central bank), has hiked interest rates three times since the beginning of the year in response to inflation and in an attempt to slow down the economy. And financial experts are predicting another rate hike this month

Paying down debt is always a number-one piece of advice to build financial stability, but when the economy is unstable and a recession is possible, it becomes critical to dump debt. 

Why Pay Down Debt to Prepare for a Recession? 

Recessions are defined by slow economic growth and greater uncertainty. This slowdown shows up in several ways on a macro level, like decreased GDP (Gross Domestic Product, i.e. how much America is producing and selling). But for people (as opposed to economies), recession usually leads to 3 telltale things: 

  • Cost of living goes up
  • Wages are cut and layoffs become more common
  • A decrease in consumer spending caused by (1) and (2) above, which further deepens the economic slowdown

“Recessions cause consumers to almost instinctively protect their financial position, by spending less and looking for ways to protect their income” says Jessica Owens, financial advisor at Brice Capital “Both are smart moves. But if you are carrying significant credit card debt, now is the time to make aggressive moves to resolve that debt.”

Owens details the reasons:

You want to free up your credit as protection

A less-secure job market means you need to put yourself in a position to be resilient, should you experience job loss or wage cuts. And part of that resilience comes from having a solid emergency fund in place or ensuring there’s wiggle room on your credit cards.

You want to avoid increasing interest rates

With interest rates likely going to continue to rise, carrying a lot of credit card debt is likely to get even more expensive than it already is. An additional percentage point of two added to already sky-high interest rates can push your balances into the danger zone, and possibly max you out. 

This is why debt consolidation loans are a good option at this moment, before a recession strikes. If you have sufficient household income, you can qualify for a loan that is likely a much lower rate than your high-interest credit cards. But you’ll want to roll all your credit card debt into a consolidation loan soon. After a recession, interest rates are likely to continue to climb.

You may not be able to access loans as economy contracts

Once the economy is in a full-blown recession, capital tends to freeze and stay in place and accessing new debt – i.e new loans or new credit cards — becomes much more difficult and burdensome. In other words, lenders become more cautious in the same way consumers become more cautious. 

Debt Consolidation Loans are a Good Option to Pay Down Debt — If You Act Now

With all the above looming economic changes in the wings, now is the time to make a definitive plan to manage any credit card debt you are carrying. And transferring that debt to a debt consolidation loan is a relatively straightforward manner for doing just that if you don’t have the means to pay debt down right now. 

“Debt consolidation loans allow you to basically pay off all of your high-interest credit card debt with a single loan,” says Owens from Brice Capital, which specializes in debt consolidation loans. “And many people qualify for a lower interest rate than what they are currently paying,” she says.

Both your monthly income and your credit rating will both play a role in determining what kind of interest rate you can get for a debt consolidation loan. And your total debt load also plays a part. You are able to do some online research to see what your new monthly payments might be with a debt consolidation loan, using online calculators

But the surest way to find out if a debt consolidation loan is right for you is to speak with a consultant. The consultant will ask you a few questions and be able to provide an analysis of your situation right away. The most important step is to take the first step, before a recession further dampens consumers’ ability to manage their finances.

Debt-To-Income Ratio: What Is It and Why Is It Important?

Debt-To-Income Ratio What Is It and Why Is It Important

A recent study found that only approximately 29% of American adults are considered financially healthy. A big part of improving financial health is paying off debt. Some people seem to think that the best way to obtain the little extras they need in life is by taking out loans or using credit cards. Debt-to-income ratio is vital to your financial standing.

While using credit or loans will help you buy something faster, it can also affect your financial health. When applying for any loan, one of the main things a lender will consider is your ratio. Below is information about this term and the importance of a low debt-to-income ratio. 

What is Debt-To-Income Ratio?

The term debt-to-income ratio is used to compare a person’s monthly gross income and their monthly debt expenses. If you want to calculate your own ratio, you will need a few basic pieces of information. 

Making a list of your monthly personal loan, car loan and credit card payments is the first step in this calculation process. Once you have the total amount of payments you are making monthly, you need to figure out your monthly gross income. 

You will then divide the debt payments you have by your income and that percentage is your debt-to-income ratio. Be sure you calculate your monthly income before taxes to ensure you get an accurate ratio. 

The Importance of a Good Debt-To-Income Ratio

When applying for a loan, the lender you use will consider many factors before approving your request. One of the main things a lender wants to know is how much debt you currently have. If your debt-to-income ratio is high, it will be difficult to get a loan for a significant amount of money approved. 

Calculating your ratio before applying for a loan can help you greatly. Most lenders will approve loans for applicants with a ratio of 36% or below. If your current debt-to-income ratio is higher than this, you may need to address this issue before applying for a loan. Avoid making money mistakes by applying with low ratio.

Great Tips For Lowering Your Debt-To-Income Ratio

Is your current ratio high? If so, it is time to do something about it. One of the first things you can do to lower this ratio is to pay off your outstanding debt. Most American consumers have around $3,000 worth of credit card debt

Regardless of how much debt you have, it is crucial to make a comprehensive plan to pay it off quickly. This is a good way to reach financial stability. You also need to avoid taking on any new debt until you get your current debt-to-income ratio down. By recalculating your ratio monthly, you can estimate how much progress you are making. 

Education is Power

The more you know about what lenders look for when inspecting a loan application, the easier it will be to get approved. By following these tips, you can lower your debt-to-income ration and get the funding you need with ease.