2020 was 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.
Economists predict this will trickle down into 2021, feeding into tighter lending practices and, by extension, liquidity issues for massive corporations and the common man.
This article will break down how best 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’ve got a credit card (or two), 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 several 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 budding entrepreneurs who may have a promising business idea but need a little ‘bling’ to jumpstart their dream.
It might be the 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 debt obligation that arises from it is handled smartly.
People who avail 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 dues. Due to loss of employment, no steady income, and increased economic instability, it became 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 at the top of your mind as you venture into 2021.
#1. 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’s essential to dedicate time from your monthly financial planning to earmark a suitable percentage of your income toward an emergency fund.
A great way to do this is by looking 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!
#2. Prioritize 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 payments or delaying monthly repayments of your loan, always make it a priority to pay it back at the earliest.
Avoid paying back just the bare minimum 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 boost 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 delayed payments on your track record 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.
#3. Consult a Professional
Financial planning isn’t something you have to do alone. In fact, in some cases, consulting a veteran and expert from that field could provide you the insight you need to manage your money better.
This is especially important before you make any major decisions regarding your money. It’s important to have a 360-degree picture of how meaningful choices can impact your short and long-term positioning.
This is where credit counselors come in.
Credit counselors provide expert advice to individuals in need of credit advice. This could be those who have racked up a lot of credit card debt and financial dues, but that is not always the case.
Individuals sometimes consult with credit counselors ahead of their financial planning to lead themselves down the best path and strengthen their credit positioning.
Credit counselors provide a realistic view, considering external factors like the economic and banking policies in place, the financial climate, and other perspectives that they would be privy to by virtue of their professional experience.
You can start the year strong and confident by hiring an expert for their professional opinion.
Crunch Through with Planning
No matter how much your assets are worth, the level of your debt obligations, your salary figure, or even how much you have set aside in an emergency fund, you can find a way to strengthen your finances.
While there are multiple avenues you can take to prepare for the possibility of a worsening credit crunch, merely being mindful of it and planning is a great first step.
So, what are you waiting for?
Start crunching your brain and forging a great financial start to the year!
Beatrice Manuel is a freelance writer for hire specializing in finance and digital marketing. She helps brands fulfill their vision through words by producing sparkling content pieces that convert. When she isn’t helping her clients win readers, you’ll find her working on her next novel and posting on her literary blog.