Will inflation hurt your credit score?

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Could inflation hurt your credit score? The short answer is not directly — the long answer, however, is a bit more complicated.

As prices rise on everything from groceries to mortgages, your wallet does take a hit. And this could end up costing you when it comes to your credit score.

Read on to find out how inflation could affect your credit, and what you can do to help prevent its impact.

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What is inflation?

Inflation — a long-term rise in the prices of goods and services — has far-reaching consequences on all our pockets and overall quality of life.

While inflation has slowed down since the beginning of the year, it continues to hover around 3%. It also remains a major concern, with a 2024 Pew Research Center showing that 62% of Americans cite inflation as a serious problem for the country.

It’s no surprise either as, even if the inflation pace has slowed, most consumers find that prices continue to be the same or higher. Additionally, as the Fed raises interest rates in an effort to curb it, credit cards and loan rates rise, making debt harder to pay.

How can inflation impact your credit?

While inflation might not have a direct impact on your credit, it could certainly affect aspects of your finances that can end up hurting your credit.

Increased debt

Debt can increase during inflation for a couple of reasons. For one, if salaries don’t go up accordingly, many people will rely on credit cards to pay for their everyday expenses and emergency buys. In fact, we are already seeing this phenomenon as U.S. credit card debt increased along with inflation last year.

And, because interest rates are rising — and credit cards’ APR rise accordingly — this debt can be harder to pay off for those who carry a balance month to month. This will, in turn, increase customers’ credit utilization ratio, which plays a significant role in credit scores.

Missing payments and defaults

As consumers become overloaded by debt and higher expenses, they are much more likely to miss payments on their current obligations. This increases the chance of late payments being reported to credit bureaus or that bills become delinquent enough to be sent to collections.

This risk is even higher for borrowers with adjustable rate mortgages since, once the set rate period is over, its interest rate will reset to the prevailing rate in the market. For many consumers, this can mean much higher — and even unaffordable — house payments.

How to protect your credit from inflation

There’s no way around it: protecting your credit and your wallet in a high-inflation environment takes a whole lot of resourcefulness and some creative budgeting.

The good news is that you do have choices. Here are some steps you can take:

Review your spending carefully

It’s a good idea to sit down and look at your expenses for the last three months to see whether you can afford to cut down on non-essential spending. If you can, make sure to reallocate that money toward paying down credit card or other high-interest debt.

Find ways to save money on everyday items

Grocery spending, for example, is easily one of the largest expenses for most households. But there are ways to cut down on prices, such as: :

• Meal planning with a set budget in mind
• Comparing prices between local grocery stores
• Using coupons
• Eating before going shopping to avoid impulse buys
• Using credit cards that reward grocery spending

Some credit cards offer high rewards for grocery shopping. If you already have a credit card, verify its points structure and see whether they offer points, cash back or miles for purchases made at supermarkets.

Consider a side hustle

If your salary isn’t keeping up with inflation, and there’s no possibility of another job or salary increase in sight, then a part-time gig could be the solution.

Whether it’s rideshare or delivery driving, or you have a particular skill you could market as a freelancer, another source of income could help you pay for your everyday expenses without resorting to credit cards.

Set up spending alerts

As we said above, your credit utilization ratio — the percentage of available credit you’re using — is a big factor in your credit score. Generally speaking, the lower this ratio the better. This means that the less you owe on credit cards or lines of credit from one month to the next, the better for your score.

Setting up spending alerts can help you keep an eye on just how much of your available credit you’re using. The general rule of thumb is to keep this ratio below 30% (although single digits is even better).

Set up an alert for the amount that would represent your desired percentage and your card issuer will send you an email or text once you reach that amount.

Consider refinancing an adjustable-rate mortgage

Borrowers with adjustable-rate mortgages (ARM) could find themselves in trouble if interest rates rise when their mortgage is due for a “reset”.

If you have an ARM due for an increase, consider refinancing to a fixed rate. Although mortgage rates are higher than usual right now, if a fixed rate is lower than you’ll pay on your ARM, it might be worth refinancing.

Get credit assistance if necessary

If you can’t make payments on your loans or bills, it’s time to ask for help. There are plenty of non-profit credit counseling services that can help you come up with a plan to tackle your payments and/or negotiate with your creditors for you.

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Will inflation hurt your credit score? FAQs

When will inflation go down?

Inflation has slowed down considerably — falling to 3.3% as of May 2024, which is considerably lower than the 9% peak in June 2022. Most experts expect inflation to keep decreasing; unfortunately, this doesn’t mean prices for everyday consumer goods will fall along with it.

How does inflation impact credit card debt?