Does your credit score need help? Don't look for quick fixes. Set up a realistic budget that will help you repair your credit score over time.
Consider these six ways that a budget can raise your credit score and keep it high.
1. Paying Bills On Time – On-time payments are the most critical factor in calculating your credit score, yet Americans continue to miss payments. According to NerdWallet's 2018 Consumer Credit Card Report, the main reason people don't pay bills on time is that they simply forget.
Budgets help establish a monthly regimen and provide the discipline needed for regular bill payments. Review your budget several times a month to keep on track and remind you of when upcoming payments are due.
2. Tracking Your Spending – Maybe you run high credit card balances because you don't realize how much you spend compared to your income. A budget provides a framework to compare your intended and actual spending. Greg McBride, Senior VP and Chief Financial Analyst at Bankrate.com, calls a budget"your scorecard to tell you whether or not you're living within your means."
Refer to your budget throughout the month as you spend. Make a note of how much of your budget you've used – even for small purchases. You'll be amazed at how quickly the small things add up.
Tracking your spending within budget boundaries will help prevent overspending and keep debt low –?improving your credit score in the process.
3. Reducing Impulse Buys – Once you track spending within a budget, you're more likely to avoid budget-busting impulse buys or full-blown shopping sprees.
High credit utilization – using a large percentage of your available credit limits – leads to lower credit scores. It's important to keep balances low (less than 30% of your limits is recommended). A budget allows you to stay within the 30% limit and reminds you of why you shouldn't purchase that outfit or small appliance that you really don't need.
4. Paying Down Debt – You can't pay down debt without a monthly surplus. A budget allows you to set a monthly savings goal to apply toward your outstanding debt balances. Allocate a certain amount of your budget to debt reduction, just as you would for rent, food, and other necessities.If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.
5. Establish A Savings Mindset – Once the debt has been reduced, a budget keeps the fiscal discipline going. Put monthly surpluses toward savings for large future purchases and emergency funds. McBride calls an emergency fund "the buffer between you and high-interest-rate debt."
You'll need to borrow less money for large purchases and will be more likely to avoid high-interest-rate credit card debt – keeping credit utilization low.
6. Define Your Discretionary Funds –You won't stick to any budget if there's no money for occasional fun purchases. It shouldn't be much – just enough to keep you from blowing your budget in frustration and lowering your credit score.
If you do slip and overspend in one month, it's not the end of the world. Adjust your budget to account for the extra debt and renew your commitment to do better next month.
Check your credit score regularly to track your progress and keep up the positive financial momentum – and check your credit report for any errors or signs of identity theft that could be harming your credit score. Make sure you get the score that you deserve.You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
A budget is a great tool to help increase your credit score – but only if you make your budget realistic and have the discipline to stick to it.