8 Ways Creating a Budget Will Improve Your Credit Score
Budgeting sometimes gets a negative reputation as a practice reserved for people who mismanage their money when ironically not having a budget is more likely to jeopardize your finances -- and worse, your credit score. Very few Americans, it seems, are good at keeping a budget in place, perhaps because they're under the illusion that frequently checking their bank accounts online is good enough.
Having No Budget Can Hurt Your Credit One of the best financial tools to track your income and your expenses so you can balance your spending and your saving in the best ways possible is a budget. Budgets are similar to road maps: They are financial tools that help people set goals for the present, see what's ahead for the future, and avoid financial pitfalls and potholes along the way. Without a budget, it's hard to monitor where your money is going -- and without a plan in place, you might be unknowingly harming your credit.
Here are essential steps in creating your budget to gain control over your finances and improve your credit score:
- Establish important goals. Start your budget by making a list of the financial goals you'd like to accomplish. It could be saving for a house, college tuition or retirement (long-term goals), or setting a deadline to save for a vacation or pay down some debt (short-term goals).
- Itemize your expenses. Jot down every single expenditure you had last month and their amounts. Consumer.gov recommends starting with bills: First, list expenses that remain fixed each month, rent; those that vary month to month, utilities; and those bills paid annually or semi-annually, car insurance. Then, write down smaller fluctuating expenses. Organizing in this way can help you determine where to start saving money thus enabling you to clear debt balances that impact your credit.
- Determine all your income sources. In his Guide to Budgeting, Dave Ramsey suggests compiling every source of possible revenue. Be elaborative with this list because it plays a massive part in your budget -- and your credit.
- Subtract expenses from earnings. The ideal amount you calculate when you subtract costs from profits should be a positive value. The same goes for being aware of what you're putting on your credit cards and keeping track of your ongoing balances. Ignore these factors, and your FICO score may take a severe hit later on.
- Redesign your spending plan. Allocate portions of your income each month to different expenses, and set spending limits, so you don't go over budget on some and under budget on others.
- Find ways to reduce your spending. Other frugal alternatives include buying generic products instead of name brands or cooking at home. The practice of moderation makes a living within your means easier.
- Take advantage of budgeting tools. Prepare a spreadsheet to make budgeting and tracking your credit card use easier.
- Stick with it. Use your budget monthly, track what you spend weekly and always monitor your credit usage.
To optimize your budget, you should spend an hour with it each week, according to MoneyCrashers. In time, you'll be less reliant on credit, more timely with bill payments and more in control of your spending -- enough so that you'll have improved your financial discipline and your credit score.