2020 has been a challenging year for the world, financially and otherwise.
With COVID’s impact overtaking the globe and spiraling the worsening economic condition, several people worldwide felt the mark in their day-to-day life.
This also trickles down to financial institutions, banks that make up the bane of the financial system. With the threat of non-performing loans and debt obligations growing, the starting touches of a credit crunch spread through the year.
A financial advisor near me predicts this will follow through into 2021, feeding into tighter lending practices and, by extension, liquidity issues for massive corporations and the common man.
This article will break down the best way to prepare for the growing, and anticipated, credit crunch.
But to conquer a challenge, one must first understand what it means…
Debunking the Credit Crunch
Credit is an integral aspect of many a person’s finances.
Whether you have got a credit card (or several), a short-term loan from your bank, a mortgage on your house, or even a delayed payment system with your local vendors; it all works off the same concept: credit.
Utilize the money now, pay it back later.
There may be numerous reasons why people opt for credit as opposed to cash-based solutions. It’s not so easy to get your hands on a sizeable amount of money, and in some cases, credit-based financing may be the best way forward.
For example, in the case of university students who opt for student financing to pay off their tuition. Or even upcoming entrepreneurs who may have a promising business idea but need a little ‘bling’ to jumpstart their dream.
It may be their wish to buy a car to support their daily life functions for the common man. For a young couple starting a family, they may wish to move to a new house to support their children.
As you can see, in many scenarios, obtaining credit facilities is the pathway to a better future. That is if the new debt that arises from it is handled smartly.
People who use credit services have to be careful about how they use it. Spending credit for personal entertainment, gambling, or any other non-essentials can quickly lead to one’s financial demise in the form of a long-term, unforgiving debt obligation.
This is why it’s critical to know the path forward and have clear financial objectives and a money management system in place.
In 2020, no thanks to COVID but also due to other factors, lots of people lost money and worsened their financial situation. Due to loss of employment, increased economic instability and no steady income, it became much harder to handle the debt people had.
And that’s how the credit crunch begins: at the grass-root level of modern society, that is, individuals.
Tips to Improve Your Credit
So, how can you better handle your finances and avoid debt crises from forming?
The answer is better financial management.
Here are three handy tips to keep in mind as you venture into 2021.
Create an Emergency Fund
America is one of the most financially progressive countries in the world, and even there, nearly 25% of the population does not have emergency savings.
In fact, 38% of them couldn’t produce £500 without taking a loan (fuelling more of the credit crunch).
Not only is this dangerous for the economy at large, but it also puts the individuals in concern in an extremely volatile position.
It is essential to dedicate time from your monthly financial planning to earmark a suitable percentage of your income toward an emergency fund.
A fantastic way to do this is by checking over your budget, spending patterns on essentials and non-essentials, investments, and then arrive at a monthly figure you can put aside for savings purposes.
While we can’t precisely say how 2021 will go, it always helps to have an emergency savings fund for contingencies like these. You never know when you might need it!
Priorities Paying Outstanding Bills
One of the easiest ways credit can sneak up on you is through the stack of unpaid bills you have on your counter. That’s right, those ones.
Whether you’re splurging on credit card instalments or delaying monthly repayments of your loan, always make it a priority to pay it back at the earliest.
Avoid repaying just the minimum amount on the bill, too. Over time, this amount will only increase and grow your outstanding payments as a whole. As a best practice, paying the amount in full will benefit your financial planning.
Not only will this increase your credit score, but it’s also a good habit to build up in the long run for you to avoid falling into any debt traps.
Know that having a history of late payments on your credit history will also make it harder for you to avail more credit in the future if the need arises. Think of your credit score as your finance brand: the higher it is, the better your options.
A great way to remind yourself to pay your bills on time is by leveraging payment alerts or automatic payments on bills.