7 Reasons To Pay Off Your Debt Now if You Think a Recession Is Coming

If a recession hits, you don't want to struggle to manage high-interest debt at the same time, especially if your income becomes uncertain. This burden can make tough times even tougher.

Instead, make sure to increase your financial options when you need them most. Here are some reasons why now is the right time to crush your debt if you fear a recession is around the corner.

You worry about falling behind on your payments

Prioritizing repayment becomes even more important if you're already behind on debt payments, especially when there is a potential recession on the horizon.

Delinquent accounts can severely impact your credit score, making it more challenging to secure loans or favorable interest rates when you might need them most. During economic downturns, creditors often become more cautious, and options for refinancing could diminish.

Addressing overdue debt can help stabilize your financial situation and offer you greater flexibility as you manage the uncertainty of a recession.

Your debts have high interest rates

If your debts carry high interest rates — such as credit cards with annual percentage rates (APRs) of 20% or more — prioritizing repayment is usually a smart move.

High-interest debts tend to accumulate faster, making it even harder to stay ahead during economic downturns. Focus on repaying these debts now so you can reduce the amount of interest you pay over time. This will allow you to redirect the money to other financial needs instead.

Paying down high-interest debt can also help improve your credit utilization ratio, which can boost your credit score. Of course, you should consider your overall financial situation, but paying high-interest debts first can often be a smart financial decision.

You want to reduce interest costs so you can free up cash

One great way to increase your cash flow is to pay off debt so you aren't spending money on interest payments. Doing this frees up cash for your savings or monthly budget.

During a recession, this extra money can make a huge difference. And even if a recession never hits, eliminating debt is a great way to get ahead financially.

You want to free up credit in case you need it

During a recession, you might need to utilize some of your available credit to take care of basic needs and financial obligations. Therefore, clearing the decks by getting your debt paid down as quickly as possible before a downturn is often a smart decision.

Not only does paying off debt ensure you have more of your credit line available if unexpected expenses pop up, but it also can lower your credit utilization ratio and positively impact your credit score.

You can put yourself in a better financial position later by proactively managing debt now.

You already have a solid emergency fund

Once you have an emergency fund with enough money to cover three to six months of living expenses, it may be best to redirect any remaining extra income into paying down debt instead of saving even more.

Prioritize paying off high-interest debt so you can keep your monthly payments low in case a recession strikes.

You don't want to count on interest rates falling during a recession

It is true that interest rates are often lower during a recession. During economic hard times, the Federal Reserve might lower its target federal funds rate in an effort to push interest rates lower across the board and boost the economy.

However, you shouldn't rely on this outcome. Paying down debt now is always a better plan than hoping that interest rates will fall in the future.

You can't control whether or not interest rates slide, but you can control how much debt you have as a potential recession approaches. It's best to focus on what you can control instead of what you cannot.

You want lower monthly payments

Debt that is attached to high interest rates can cause your monthly payments to swell. By paying down debt, you can eliminate these monthly expenses and keep more money in your pocket.

You will weather tough times better if you face fewer payments each month. Having some wiggle room in your monthly budget can leave you less stressed.

Bottom line

Paying off debt ahead of a potential recession can put you in a better position to weather tough times. Reducing high-interest debts not only lowers your monthly expenses but also enhances your ability to manage unforeseen financial challenges.

This proactive approach can help you prepare yourself financially to withstand economic downturns.

Paying down debt also may reduce stress and anxiety, leading to improved mental well-being. Addressing your debts now may help you improve both your financial and emotional stability.

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