How budgeting can impact your credit
Creating a budget and sticking to it can have an indirect positive impact on your credit in several ways. Budgeting can help you:
- Stay current on your bill payments. Following a budget can help make sure you don’t run out of money by the time bill payments are due. Late and missed payments can result in penalties and fees that will only add to your financial strain. Not only that, your creditors can also report delinquent accounts to the credit bureaus (Experian, TransUnion, and Equifax) once they are 30 days past due or later. Payment history is the most important factor in your credit scores. A late payment, and the resulting negative mark on your credit report, can do significant damage to your credit scores.
- Reduce your reliance on credit. If you find yourself resorting to credit cards to hold you over until you get paid again, you might end up carrying a high balance on your cards. Overcharging can increase your credit utilization, which is the second most important factor in your credit scores. Keeping your balance under 30% of your credit limit on each card helps prevent credit harm, but the lower, the better.
- Pay down your debt. If you’ve already built up large debts from credit cards and other debt, budgeting can help you bring them down to size. Owing a lot of debt can not only impact your credit utilization, but can make it harder to make at least the minimum payment toward what you owe.
How much of an impact budgeting will have on your credit depends on your credit history and financial situation.
How to create a budget
Step 1: List your income
Start with income that you regularly receive each month. Compute the amount you receive by adding up the net pay found on your check stubs.
Next, jot down any income you receive that’s irregular or changes each month. If your earnings fluctuate because you’re an hourly employee or self-employed, average your earnings from the past three to six months.
Step 2: Compute your expenses
Review your credit card and bank statements for the past three to six months, noting the expense type and amount in your transaction history. Create a category for it in your notebook or spreadsheet.
You may have categories for housing, food, utilities, insurance, debt payments, groceries, child care and pet supplies, just to name a few. Feel free to make these categories more detailed to give yourself a better idea of where your money goes each month.
Step 3: Set realistic goals
In order for your budget to help you avoid overspending and going into debt, it’s vital that you set realistic goals for yourself. When you write down your goals, attach figures and decide how much it will cost to make them a reality.
Being realistic also means letting yourself have some fun. A carefully budgeted life doesn’t have to be one without the occasional splurge—in fact, planning for some impromptu spending can reduce the anxiety that might accompany it.
Step 4: Monitor your spending
After your first month with a budget, take a look at how your spending ultimately lined up with the financial goals you set for yourself. If it doesn’t align, you may need to make adjustments to your budget goals, your spending, or both.
Step 5: Stick to the plan
Deciding on a plan is essential, but actually sticking to it is what matters most.
When you struggle to stay on task, refer back to the financial goals you set as they are the reason why you are budgeting in the first place. Remember that things like improving your credit score and building a retirement fund tend to take time, so don’t lose hope if you don’t see results immediately. Stay focused; you’ll thank yourself later.
For more information about budgeting and credit scores, see the following articles: