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3 ways to manage your debt ahead of a possible recession

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The economy is still strong, but concerns remain that the U.S. could be headed for a recession in the near future. And while navigating a recession is difficult, it's even harder if you're saddled with debt.

If you lose your job during a recession, for example, you could fall behind on your mortgage payments or student loans, or spiral even deeper into credit card debt. Banks, sensing that people may be unable to make payments, tend to tighten their lending policies, making it harder for people to get new credit.

"During the last recession, there were instances where credit card users saw their minimum payment jump two to three times what they had been used to paying," says Lauren Anastasio, a certified financial planner at SoFi, a company that offers personal loans and refinancing options for student debt and mortgages.

"If you've been carrying card balances and getting by on the minimum payments, be prepared for those banks to start demanding larger payments from you each month," she says.

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Economists have a hard time forecasting recessions, so just because many of them expect one soon doesn't mean it'll happen. Regardless, you can prepare by getting your money and your job in good shape, and by considering how to deal with your debt during a downturn.

When it comes to your debt, it's important to take steps now to make sure you're able to effectively manage it during an economic downturn. Here are some things you can do now:

1. Focus on paying down high-interest balances

High-interest debt can be damaging for your finances, since compounding works against you. So, while the economy is still strong, you should do everything you can to pay down your highest-rate debts, whether it's a credit card balance or an auto loan.

"Try to get rid of it. While things are good, pay that debt down as best you can," says certified financial planner Carolyn McClanahan of Life Planning Partners in Jacksonville, Florida.

During the last recession, there were instances where credit card users saw their minimum payment jump two to three times what they had been used to paying.
Lauren Anastasio
Certified financial planner at SoFi

2. Look at refinancing options

With interest rates dropping, this may be a good time to see if refinancing could save you money on your auto loans, your mortgage, or your student debt. A lower interest rate could decrease your monthly payments or help you make headway in eliminating that debt faster.

With credit cards, you may be able to transfer or consolidate your balances using a zero-interest balance transfer offer. Anastasio warns that this is a move better done sooner than later: Such offers are likely to dry up when the economy takes a turn.

"One very important takeaway from 2008 is that those offers are likely not going to be there anymore when we find ourselves in the next recession," she says. "When markets are down, it becomes more difficult for people who typically rely on credit to acquire it."

3. Meet with a debt counselor

If you're struggling, consider meeting with a debt counselor to work out a plan for repayment, suggests McClanahan. This, she says, can help you set up a basic financial framework and put you in a better position to ride out a recession than if you do nothing at all.

National organizations, such as the National Foundation for Credit Counseling, offer free consultations. Some cities also have resources that residents can use, often for no cost.

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