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Consumer Bankruptcy Tax Debt Relief Office in Greenbelt, MD

What does inflation mean for your credit score?

If your dollar does not seem to go as far as it did just a few months ago, your mind is not playing tricks on you. In fact, according to reporting from CBS News, the prices of goods and services have climbed faster in the past year than during any period in the previous four decades.

By itself, inflation should have no effect on your personal credit score. That is probably not true for the effects of inflation, however. Specifically, if you must pay more for the items and services you need to live, you may have little choice but to reach for your credit cards.

Your credit utilization ratio

Your credit utilization ratio is a major component of your overall credit score. This ratio compares the credit you are currently using to the credit you have available. For example, if you have a credit card with a $1,000 limit and have an outstanding balance of $500, your credit utilization ratio is 50%.

To maintain a good credit score, you should aim to keep your credit utilization ratio below 30%. If your ratio is higher than this threshold, lenders may not extend credit to you. Even if you manage to secure a loan or credit limit increase, an elevated credit utilization ratio is likely to force you to pay higher interest rates.

Your financial options

If you only have the financial resources to make the minimum payments on your credit cards, you simply may not be able to lower your credit utilization ratio. Therefore, it may be advisable to explore your financial options.

Ultimately, because bankruptcy is likely to discharge many of your credit card debts, it may help you combat the negative consequences of skyrocketing inflation.