Managing credit in an economic downturn

[Anonymous]

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@Revelate wrote:

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@Anonymous wrote:

Major banks will stop lending and slash limits but credit unions generally aren't as affected by recessions since they aren't driven by profit and shareholders. Having a few CU cards in your wallet can give you that emergency plastic but as stated, you can't beat having an emergency fund. I don't have one myself because I'm not allowed to (Medicaid long term care has a $2K asset limit) so if I have an emergency, I'm going to have to rely on my CU cards. I have credit with 3 CUs and relationships with 5 CUs so while I'm not expecting to have an emergency, I believe at least one of my CU cards and likely my Capital One cards will still be there for me. 

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How do you manage that effectively?  Take any residual income and throw it at your primary residence?

More on topic though you're absolutely correct different tiers of lending institutions will go at different times, though some CU's won't be immune to the slashing.

In my case I'm banking on a HELOC to give me enough runway if I wind up on the other side of the pointy stick... though I'm already planning to basically stop driving my free cash into the market and just start hammering all my secured debt: if everything turns out OK it's losing money long term to be sure, but that's not a guaruntee and it's better to set myself up with less debt obligations.

Asset diversification too.

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Oh I definitely am not saying all CUs will be solid. I am betting NFCU will be though and just one card is enough to weather the storm. I actually doubt that Capital One would slash me either. 6 years I have had my first card with them without so much as a minute late on my payment (I actually always pay that one about 19 days before it's actually due) or maxing out the card. 

I am doing the same with my debt. I'm diverting $200 a month to savings since I didn't have one at all until I get $1K in DCU and I'm throwing the rest of my money at my cards. I don't like revolving at any time but I'm really nervous about doing it right now. I don't have any secured debt to worry about but I don't ever want to have to file BK7 again. 

As for how I manage with that $2K limit, I spend a lot of money that I wouldn't have to spend without it admittedly. Since I rent and my rent is less than half my income, I end up with about $550 a month after rent, utilities, and groceries that wouldn't normally be tied up in anything if I had no revolving balances.  I end up having to frivolously spend which is how I ended up with $4200 in revolving debt (at 0% of course) back in December for things I didn't really need. It's not perfect but it beats the alternative of being able to save but not having my long term care services. Since getting my services in 2017 I stopped drinking, stopped smoking, I am tapering off my anxiety meds, and I'm actually going to therapy and making progress towards being able to recover and get off disability when since 2011 when I first went out on disability, I was just getting worse. If I have to be totally broke to get to my end goal of recovery, I'll just have to keep being great with a budget. 

[iced]

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@audioman00 wrote:

Hi All,

I was not active on this forum 12 years ago, during the last recession, but my guess is that if any recession were to hit, CLs will be cut overnight, lending would dry up such that it might make sense to borrow ahead of the crisis if one does not have a safety net. There's so much great advice on here about how to increase your credit capacity, but it seems like it all becomes very fragile if macro events take a turn for the worst. 

Have you ever maxed out a 0% BT or two or three to have a rainy day fund? 

For those of you who were paying attention to these sort of things back in '08, would this have been a wise move had you been able to anticipate the downturn? 

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My experience from '08 (and '00) is to have your ducks in a row before any downturn. Those who do not only weather the storm, they're unaffected by tightened lending. If you are relying on credit to cover you in hard times, in hard times credit will fail you.

Have an emergency fund, in cash (in savings is fine), all the time. That's your hedge. Not credit, not stocks, not gold, not real estate, not anything that has volatility and risk. If you don't have an emergency fund, then your budget is a ticking time bomb and a recession will wallop you along with half the country. Fix your budget.

The people who suffered in '08 made a lot of mistakes and didn't plan for the worst:

- They bought as much house as the banks would let them (rule number 2 here, do NOT take all you are given by banks - they bake in squeezing every penny out of you and have their interests in mind, not yours) with as little of their own cash as the bank would let them. We like to blame con artists when we're scammed but we're just as culpable for being stupid enough to fall for the scam. Caveat Emptor!

- They lived paycheck to paycheck because living the middle-class life was more important to them than saving for a disaster. Any loss of income or increase in expense and these people are sunk.

I am certain if a recession hit I would receive no AA from any of my banks, because I don't have any of the risk factors that they look for in a recession. The banks didn't AA people left and right because it was a recession; they AA'd people left and right because the recession quickly revealed these high-risk people.

[Green456]

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@audioman00 wrote:

Hi All,

I was not active on this forum 12 years ago, during the last recession, but my guess is that if any recession were to hit, CLs will be cut overnight, lending would dry up such that it might make sense to borrow ahead of the crisis if one does not have a safety net. There's so much great advice on here about how to increase your credit capacity, but it seems like it all becomes very fragile if macro events take a turn for the worst. 

Have you ever maxed out a 0% BT or two or three to have a rainy day fund? 

For those of you who were paying attention to these sort of things back in '08, would this have been a wise move had you been able to anticipate the downturn? 

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I don't use credit as emergency fund because credit can always be cut. Sure you can max out BT card. But IMO it is just bad habit forming. And worst of all some recessions are not predictable at all. So you may find yourself out of BT offers overnight and $0 in your account and out of job. Not good....
For that reason I have dedicated emergency fund with 8 months of living expenses. And I am planning on increasing it to 12 months.

I also rencelty got myself $10,000 PLOC at 10% APR and $40k credit card at 8% APR but I would never consider these part emergency funds. Although it's a credit union, they are less likely to cut my credit even during job loss. 

[Anonymous]

I consider myself lucky, back in 08 I didn't have any CL's to slash! Was still in rebuild mode, and two CC I did have were low limits and only 50% UT. But I alwasy made my payments on time, and were twice the minimums.

While I would hate to see any AA due to a possible recession or whatever, since it took me  along time to build what I have now. It wouldn't hurt me as I'm not carrying a large debt load. 

My biggest worry right now is whether I should get a mortgage or not, rates are great ATM. But if the Banks are being extra cautious due to the market, my recent income reduction might deter them a bit. 

[Green456]

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@Revelate wrote:

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@Anonymous wrote:

Major banks will stop lending and slash limits but credit unions generally aren't as affected by recessions since they aren't driven by profit and shareholders. Having a few CU cards in your wallet can give you that emergency plastic but as stated, you can't beat having an emergency fund. I don't have one myself because I'm not allowed to (Medicaid long term care has a $2K asset limit) so if I have an emergency, I'm going to have to rely on my CU cards. I have credit with 3 CUs and relationships with 5 CUs so while I'm not expecting to have an emergency, I believe at least one of my CU cards and likely my Capital One cards will still be there for me. 

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How do you manage that effectively?  Take any residual income and throw it at your primary residence?

More on topic though you're absolutely correct different tiers of lending institutions will go at different times, though some CU's won't be immune to the slashing.

In my case I'm banking on a HELOC to give me enough runway if I wind up on the other side of the pointy stick... though I'm already planning to basically stop driving my free cash into the market and just start hammering all my secured debt: if everything turns out OK it's losing money long term to be sure, but that's not a guaruntee and it's better to set myself up with less debt obligations.

Asset diversification too.

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That's what we pretty much did. Just by paying off cars, we are saving $800 in monthly expenses. 

[Citylights18]

Within reason the more credit you have the better shape you will be in during a downturn. That will give you the possibility of running expenses on a 0% promotion and having room on other cards to BT.

You'll want to hold back some cash because even if you start a new job it might not be a couple of months before the first paycheck hits. Also having cash gives you the opportunty to invest it and even in a down market there are instruments you can trade for profit.

If you don't have enough spare capacity it places you in a position where you'll have to file for bankruptcy early. That can hurt your chances for employment.