With a Recession on the Horizon, 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 Funding Hawk. “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 —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 Funding Hawk, 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.

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