Quick Answer
In recessions, lenders tighten underwriting and reduce credit limits even for borrowers in good standing - making it useful to secure liquidity and credit lines before conditions deteriorate.
Key Takeaways
- Available credit often contracts during downturns.
- Existing lines may be reduced even if utilization is low.
- Cash reserves and unused credit lines both serve as recession-resilience tools.
The Pro-Cyclicality of Credit
Lending standards loosen in expansions and tighten in contractions. This means credit is most available when it is least needed, and least available when households need it most.
Frequently Asked Questions
Should I open new credit lines before a recession?
Educational frameworks frequently recommend establishing access to credit while underwriting is favorable, without necessarily using it. Lines opened in expansions can remain available when new applications are harder to approve.