How does inflation impact your credit score, and how can you protect your purchasing power?

While your credit score is primarily a function of your credit repayment habits, it is also impacted by a slew of other factors. One such factor is ‘inflation’. While one would suspect that inflation does not directly impact your credit score but it certainly has some bearing on it.

As prices of food and other items increase over a period of time, your purchasing power tends to fall. As a result, it is not uncommon to use a higher amount of credit to be able to maintain the same lifestyle. Because of higher credit utilisation, your credit score takes a beating.

There is another reason why inflation could impact your credit score. As a result of inflation hovering beyond the RBI's comfortable range of 4%, repo rates are raised. Consequently, overall borrowing becomes costlier in the market, thus impacting your capability to repay loans on time.

Therefore, it is important to be aware of inflation and recalibrate your credit needs accordingly so that your credit score does not suffer.

Follow these steps to prevent a fall in your credit score

I. Spending habits: You need to adjust your spending habits in line with inflation. When your credit gets too high, you must pay the minimum due—if not the entire amount—every month.

II. Monitoring your score: Another innocuous tip is to monitor your credit score from time to time. This can help you stay in control of your score.

III. Invest in assets that beat inflation: It is recommended to invest in assets which beat inflation, such as real estate and stocks. Rather than investing in a fixed deposit (FD) or a savings account, you could keep aside a small portion of your savings in inflation-resistant assets. This will help you stay ahead of the curve.

IV. Emergency fund: Another smart tip is to save and invest a small amount of money in an emergency fund. If your purchasing power declines, you could use a part of your emergency fund rather than increasing your reliance on credit.

Disclaimer: Mint has a tie-up with fintechs to provide credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.