The next recession is coming. When it’s coming is up for debate.
Some experts speculate it will occur within the next 18 months, perhaps as early as the first half of 2020.
One thing is certain – the time to prepare is now, particularly when it comes to credit card debt. Recessions can mean job losses and wealth decreases for some, both of which constrain your ability to pay down debt. Even if you’re comfortably managing your credit card payments at the moment, you don’t know what your circumstances will be within the next two years. An unexpected lay-off could seriously hurt your finances if you’re not prepared.
“When you lose your job, that’s bad enough,” said Peter Palion, CFP and president of Master Plan Advisory. “You don’t want to have $10,000, or $15,000, or $20,000 in credit card debt hanging over your head.”
If you’re carrying a balance right now, Palion recommends chipping away at it to reduce your debt load before an economic downturn. Whether you’ve accrued tens of thousands of dollars in debt or a few thousand across several cards, there are strategies you can take to protect yourself ahead of the next recession.
See related: Want to shed debt faster? Think about the money you’ll save
Take advantage of 0 percent balance transfer offers
Look for 0 percent APR balance transfer offers either on a new account or an existing card. Your current creditors may occasionally offer this promotion, enabling you to pay off a high balance faster.
However, these offers typically have an end date, and you’ll owe interest on any amount that’s yet to be paid off. There may be fees associated with the transfer as well, so look into the fine print, advised Dennis Nolte, CFP, vice president and financial advisor at Seacoast Bank.
“If they look at all the terms and conditions and there’s no hidden tricks, there’s no gotchas, then absolutely that’s a great strategy, especially if they’re disciplined,” Nolte said.
Think about your short- and long-term needs
Wrangling your credit card debt could help you obtain a loan if you anticipate needing one in the near future.
“If you see a large loan need in the near future, consider getting it now. Lenders often get much pickier about who they approve during a recession,” said Jared Weitz, founder and CEO of United Capital Source. “If you have a stronger credit score, lenders will be interested in working with you.”
Paul Fenner, CFP and founder of Tamma Capital, said it’s important to think about the long-term impact of debt as well. As a father of four, he’s acutely aware of how costly it can be to enroll kids in extracurricular activities and maintain a certain standard of life while also keeping an eye to the family’s future stability.
He said in the social media age, people see their relatives and friends taking lavish trips and assume they need to do the same, not realizing the consequences of doing so without a proper financial plan.
“That whole keeping up with the Joneses mentality is very difficult,” Fenner said. “People are always asking me, ‘How does everybody keep up with this?’”
If you see a large loan need in the near future, consider getting it now. Lenders often get much pickier about who they approve during a recession.
Oftentimes, he said, the people who seem to do it all are neglecting their savings or going into debt for their impressive lifestyles. He emphasized the importance of disengaging from that mentality, even to the point of removing social media apps from your phone to avoid playing the comparison game.
“Do you want to make financial health and well-being a priority? Or do you want to have the latest fashions and the kitchen you always wanted? It’s really about trying to get people to put blinders on, to a certain degree, and really run your own race,” Fenner said.
Getting out of debt and saving now will not only give you more freedom a few years down the road, it may lessen the impact of the recession on your family. If you’ve set aside money in case of a lay-off, you’ll have some breathing room while looking for a new job.
Even if you don’t lose your job, you’ll be able to afford expenses such as paying for your child to continue playing in a competitive sports league without putting your family into debt.
See related: Can you really win the balance transfer game?
Consider a debt consolidation loan
You might consider taking out a consolidation loan to streamline your existing debts ahead of the recession, Weitz said. A low-interest, fixed-rate loan could lower your monthly payments and help you reduce your debt burden that much faster. Personal loan APRs can be as low as 5.95, according to Bankrate – much lower than the near-18-percent average APR for credit cards.
See related: What to do when credit card debt becomes an emergency
Change your behaviors
Regardless of the current economic situation, establishing new behaviors is your best bet for minimizing your losses long-term.
“I think that a good approach would be to always think about your credit cards as though there’s a recession around the corner, that should keep people out of trouble,” Palion said.
Taking care to avoid high balances and only charging what you can pay off each cycle will help you prevent heavy debt. If you struggle to stay within your budget, self-imposed constraints can help you avoid harmful spending patterns.
Most importantly, you need to address the patterns that led you into debt in the first place.
“The bigger step is to understand how you’ve gotten into this situation and how you’re going to manage it better going forward,” Fenner said.
He said working with a fiduciary financial planner can help you understand your finances, set goals and strategize how you’re going to meet those while also covering day-to-day expenses.
Whether or not you work with an advisor, have a plan for how you will bring down your credit card balances. Nolte acknowledged that people sometime use credit cards when they don’t have emergency savings or other assets on which to draw. But if you’re unable to pay those balances off right away, create a strategy for paying it down. Even turning to a friend or family member for advice can help you calmly figure out how to regain control.
The critical thing is not to simply ignore the debt.
“Just don’t pile it on to where you’re stuck,” Nolte said.
Regardless of how much credit card debt you currently hold, evaluate your position ahead of the next recession. Take steps today to reduce your risk of falling into a serious financial hole if your income should destabilize in the next two years.
Editor’s note: An earlier version of this article quoted a source who has since been discredited. Her quotes have been removed.