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How the Fiscal Cliff Could Hurt Your Credit

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As the president and Congress battle it out over their plans to avoid the fiscal cliff, the deadline for making a decision gets closer and closer. While the immediate effects would be a big increase in taxes for 90 percent of the population, the lasting effects could mean a weaker economy and quite possibly another recession. If the country slips into another recession, that could have major consequences for the entire credit industry, including your credit.

Learning From the Last Recession

Falling off the fiscal cliff could mean another recession for the country. Another recession could mean a number of things, including a higher unemployment rate, a slower economy and, of course, more debt. So what does that mean for credit? If the last recession is any indication, these are some credit issues we might face:

Tighter lending standards: During the last recession, lenders tightened their standards when it came to whom they were lending. From mortgages to credit cards, it was harder for most Americans to gain a loan or a line of credit, especially if they didn't have an excellent credit score.

Higher interest rates: Not only will it be harder to get a loan or a line of credit, it will probably be more expensive. The country has its own "credit score," called a credit rating. If America's credit rating goes down, they are seen to be a greater risk, and the government's borrowing rate goes up. If the government's rate goes up, so do the corporate rates in the country, which means higher interest rates on mortgages, car loans, student loans and credit cards. The credit rating agencies have already said that they are considering downgrading the U.S. if the fiscal cliff situation is not resolved.

Lowered credit limits: Not only can credit cards offer lower credit limits on new accounts, but then can cut credit limits on existing accounts. A lower credit limit means you're using a higher percentage of your available credit, even if your debt doesn't change. This gives you a higher credit utilization ratio, which in turn will lower your credit score.

What You Can Do to Prepare

Unlike the last recession, we know this one is coming if the fiscal cliff problem is not solved. If you are worried about your credit score or your ability to get a loan or line of credit during the next recession, there are some things you can do to prepare.

Start saving now: Make sure you will be able to cover all of your bills in the coming year, including the increase in taxes that the fiscal cliff will bring.

"Any time cash flow gets tighter, it's possible to see a domino effect as one bill becomes late, which makes the next bill late, and so on," warns Beverly Harzog, credit card expert and author of The Complete Idiot's Guide to Person-to-Person Lending. "Those who have savings will have a better chance to survive an increase in tax payments."

Not only will you have to foot the bill for your increased taxes, but the recession also raises questions of unemployment, lowered credit limits, and other financial uncertainties. Having a stockpile of cash can not only alleviate some of the financial strain, but also help you pay your bills on time so your credit score isn't affected.

Make sure your credit report is clean: Now is the time to do everything you can to boost your credit score. Find a credit report monitoring service that can help you check your report for any mistakes or false information. And here is a list of other ways you can help build up your credit score.

Apply for your loans or lines of credit now: If you think you might have trouble getting loans or lines of credit after the recession hits, it might be a good idea to apply for those now, especially credit cards. Of course, don't rush into any major decisions about a house or a major loan, but keep in mind that credit might be harder to come by if we slip into another recession. And if credit limits are lowered on your existing cards, it will help to have the additional credit that a new credit card can offer.

Bottom line, going over the fiscal cliff could do some serious damage to the economy, which in turn could affect your financial security in the coming years. Make sure you are prepared for any financial issues now to avoid any problems in the future.