Many financial experts believe the country is headed for a near-term economic slowdown. However, some are saying that the predicted 2023 recession could become a prolonged one. The pessimistic outlook is inciting the same dread as the 2008 crash.
Even consumers (66%) are fearful of a too-close-to-home recession, with 82% admitting to worries about inflation damaging their purchasing power.
The Federal Reserve has been scrambling to cool inflation for a while now by implementing a plethora of aggressive interest rate increases. And, as many reports state, the U.S. central bank isn’t finished hiking the rates yet.
Such increases are making it horrifyingly expensive for consumers to borrow money across the board — everything from personal loans to credit cards is affected. The issue is that as borrowing becomes ever-prohibitive, consumers will start spending less, contributing to the dreaded 2023 recession forecast.
With a potentially severe economic downturn on the horizon, residents of the United States of America are wondering whether they can turn to credit cards for financial safety nets if they lose their job.
The answer may not be all that surprising — yes, credit cards can help during recessions. However, it isn’t necessarily the right option for everybody.
Credit Card Debt and Recessions: The Main Issue
When losing a job during a recession, unemployment benefits only give previously employed people a portion of their missing paychecks. So, many think they can cover the shortfall with their credit cards.
And, technically speaking, they aren’t wrong. It’s possible for job seekers to make ends meet with credit cards and repay the damage once they find new employment.
However, this approach oozes risks.
Credit card owners are charged interest on the outstanding balance every time they carry it forward. And since the average interest rate for credit cards in America is 22.4% (the highest since 2019), the amount owed by the user could end up being diabolically high.
With increasingly high rates, racking up credit card debt may not be the best way to supplement unemployment benefit checks.
Furthermore, those who maintain a too-high credit card balance could face damaged credit scores. Initially, that may not be a problem. However, any negative impact on credit ratings ruins chances of borrowing money in the future — unless, of course, it’s rebuilt.
Emergency Savings Over Credit Cards
While falling back on credit cards can be people’s only option at times, it’s much better to utilize emergency savings during a recession.
Financial advisors suggest accumulating enough money in a savings pot to fund three months of living expenses. Although, for extra security, many recommend six months’ worth or more.
Residents who use credit cards during economic slowdowns risk hindering their own financial recovery after the recession ends. Outstanding balances threaten to cloud people’s financial climates for years.
Therefore, individuals should work to accrue emergency savings, reducing the likelihood of needing help from their credit cards.
Experts Encourage Wise Credit Card Provider Choices Amid Fears of Recession
Despite all the warnings, credit cards can help cover one-off, unforeseen expenses during rocky financial times. And those that come with perks like extended warranties, purchase protections, discounts, and more are generally preferred.
Still, experts encourage people to choose their credit card provider very wisely, especially when a recession could be around the corner.
Those who currently have credit card debt should consider switching to one of the top credit cards that are wiping out interest rates for a maximum of 21 months. That means users won’t need to pay interest until 2024 and, thus, hopefully seeing them through the predicted 2023 recession.