How Does Inflation Affect Your Credit?

A newspaper article has inflation as a headline with bolded black ink.

Inflation—the tendency for the cost of goods and services to increase over time—has been in the news in recent months, prompting some to worry about its potential impacts on their personal finances and credit. Inflation has no direct effect on credit reports, credit scores or your ability to qualify for loans or credit, but it can influence credit indirectly if it affects your household budget. Here's a rundown of how inflation and credit are related—but mostly unrelated—to one another.

What Is Inflation?

The federal government tracks inflation using statistical measurements known as the consumer price index (CPI). The CPI tracks the prices of consumer goods and services and breaks out separate measures of food and energy costs. Inflation happens when prices rise and each dollar of income has less buying power. In April 2021, the CPI saw its largest year-over-year gain in eight years. While inflation can be a byproduct of healthy economic expansion, and many economists expect the recent trends to be temporary, others are concerned about the trend.

Inflation Is Not a Credit Score Factor

Rising prices and the dollar's purchasing power have no direct impact on credit or credit scores: Credit scores are calculated using the data compiled in your credit reports by the three national credit bureaus (Experian, TransUnion and Equifax). Credit reports document your accounts, their status and your history of borrowing and repaying debts. Economic measurements such as inflation do not influence credit scores. Only the following factors affect your FICO® Score , which is the credit score used by 90% of top lenders:

  • Timely payments: Paying your debts on time each month is the top factor for promoting credit score improvement. As a result, late or missed payments can do significant damage to your credit scores. Payment history is responsible for about 35% of your FICO® Score.
  • Credit usage: Your total debt, and especially your credit utilization—the percentage of your credit card borrowing limits represented by your outstanding balances—contributes about 30% of your FICO® Score. As the sum of all your balances approaches and exceeds 30% of the sum of all your credit limits, your credit scores can see a potentially significant drop.
  • The length of your credit history: Lenders value borrowers with lots of experience managing debt. For that reason, credit scores tend to increase over time in the absence of missed payments or other credit slip-ups. The age of your credit history accounts for about 15% of your FICO® Score.
  • Credit mix: Lenders also value a borrower's ability to handle multiple types of debt at once. Your FICO® Score may be helped if you have multiple open accounts, and combinations of installment debt and revolving credit. Credit mix is responsible for about 10% of your FICO® Score.
  • New credit: When you apply for a credit card or loan, the lender typically requests a copy of your credit report and, often, a credit score based on that report—a credit check known as a hard inquiry. Hard inquiries have the potential to cause temporary credit score drops. The appearance of a new credit account can also result in a short-lived score drop. New credit accounts for about 10% of your FICO® Score.

How Inflation Can Indirectly Affect Credit

While inflation cannot directly influence your credit scores, big changes in the value of the dollar could lead to circumstances that hurt your credit scores and limit your ability to borrow money:

  • Unaffordable payments: If the prices on everyday necessities increase to a point that you're forced to choose between, say, buying groceries and making monthly debt payments, then late or missed payments could damage your credit scores.
  • Increased debt: If you resort to using credit cards to cover expenses your income can't cover in full, higher card balances and utilization could start to affect your credit scores.

Managing Credit in Times of Inflation

Strategies to consider for managing your finances in times of inflation include diversifying your investment holdings, seeking a raise or starting a "side hustle" to boost your income. Here are a few other basic steps:

  • Think hard about major purchases. Factors influencing today's inflationary trends include limited availability coupled with high demand for goods and property in many parts of the U.S. That means this may not be the ideal time to buy a car or purchase a house, for instance.
  • Consider selling surplus assets. When prices are rising, there's typically a seller's market for many types of high-value assets, so if you have an extra car, vacation home, RV, or other type of property you've been considering selling, inflation and market demand could help you get top dollar on the sale. Note, however, that inflated prices will work against you as a buyer if you need to replace the item you sell.
  • Plan for a rainy day. Prudent uses for any money you're able to save or that you gain from selling assets include bolstering your household emergency fund and retirement savings.
  • Pay down debt. Once your bills are paid and your other major financial priorities are covered, consider using any extra income to pay down outstanding debt. While consumer prices are increasing, the cost of existing debt—especially loans and credit cards with fixed interest rates—remains stable, so it can be a good use of funds. In addition, lowering overall debt and credit utilization can boost your credit scores and spare you interest charges.
  • Get assistance if you need It. If rising prices stretch your household expenses to a point where you're having trouble paying bills, consider working with a certified credit counselor to get advice and assistance with budgeting, prioritizing debt and, if necessary, help negotiating with your creditors to ease your monthly payments. You can also look for financial assistance in the form of grants, government benefits and access to services.

Inflation isn't a major influence on credit, but when prices are increasing, making good financial choices can help you build or maintain a strong credit profile, so you can borrow money when you really need it. You can check your credit report and get your credit score for free with Experian to make sure you're still on solid ground.