Using Budgeting to Improve Your Credit Score
Whether you work 9-5 or run a business, you’re most likely aware of how budgeting works regardless of your lifestyle. In short, the process involves adhering to a pre-specified amount of money and structuring your expenses and financial decision-making around it.
You can use many tactics to lower your weekly or monthly spending, like eating out less, buying preloved clothes, and reducing power usage at home.
If you use a credit card to pay for things, including groceries, food, clothes, and other consumer staples/discretionaries, then you use budgeting as a powerful tool to improve your credit score. A solid budget keeps your credit utilization low and helps you save money to pay down debt.
For many people, a budget can help avoid delayed or unpaid bills and loan defaults. Unfortunately, the practice doesn’t get the attention it deserves as most cardholders cling on to more conventional strategies, such as timely payments, becoming an authorized user, or asking for higher limits.
This post will share how budgeting can improve your credit score using a powerful multi-step strategy. We’ll also share three ways to make more room in your budget for other things.
How to Use Budgeting to Improve Your Credit Score
1. List Your Income
The first step in setting a weekly or monthly budget is listing your net income. This goes especially for those with fluctuating wages, freelance gigs, and/or small businesses. The idea is to find an average of your earnings to determine how much you have to work with.
We recommend opting for the 50:30:20 rule, which involves saving 20% of your income before spending any of it, using 50% to pay for necessities, and the remaining 30% on luxury spending, such as eating out, clothes, etc.
2. Calculate Your Expenses
One of the many reasons people fail to manage their expenses is that they don’t compute their monthly expenses. Instead, they spend blindly and remain blissfully unaware of how much money they’ve used or how much they have left to spend.
Sometimes, people use more credit than their income or take on more debt. In other cases, they’re caught in a dilemma having to choose among different bills and payments, which affects their credit score either way.
Therefore, you should look through your transaction activity frequently and categorize your spending into groups, such as food, insurance, mortgage, utilities, etc. Once you have a list, you can jot down your fixed costs and get them out of the way.
Budgeting is often based on flexible payments. For instance, you can cook more at home and increase your spending on groceries to limit eating out and paying more. Similarly, you can switch to a remote or hybrid work routine to save money on commute.
3. Set Realistic Spending Goals
Many people tend to overspend and go into debt simply because they fail to set realistic spending goals. A credit card, especially one with a limit that exceeds your income, can be tempting. As a consequence, you can easily go off track and bite more than you can chew.
You can resist overspending and avoid destabilizing your financial flow by setting a maximum limit. However, resisting doesn’t mean you can’t have fun. It’s all about self-control. For instance, if you like eating out, you can actively switch between fine dining and street food to balance your spending. Similarly, you can skip buying clothes or other things you don’t need for a couple of months.
4. Opt for a Budgeting Tool
You should opt for a budgeting tool to help crunch your numbers faster and more efficiently. You don’t have to buy specialist software, such as You Need a Budget, PocketGuard, or HoneyDue. You can manage with Google Spreadsheet or any word processing tool you’re comfortable using.
Many software solutions are either free to use or come with a trial or lesser version with basic features for a limited time. You can test them out and choose which one serves your budgeting needs best.
5. Active Tracking
Tracking your spending doesn’t sound like a fun thing to do. However, if you want to improve your credit score and reap the financial benefits, you should make tracking and monitoring a daily or weekly habit. It’s similar to inventory management since you must track money coming in and going out.
For instance, by the end of every week, you can check how much money you’ve spent so far to see whether you’re on track to reach your budget goal. If your weekly average is less than your target, this doesn’t mean you should unnecessarily balance it out by spending more in the coming week.
Using this strategy, you can also ensure timely bill and debt repayment – both factors that can increase your credit score.
3 Ways to Make Room for Your Budget
Many people damage their credit scores simply because their spending exceeds their disposable income. As a result, they cannot pay off their debt on time or indefinitely. If you’re looking to improve your score for better rates and other benefits, you’ll have to make more room in your budget and cut down your overall spending. Here are three simple ways to do this:
1. Cut Down Your Phone, Internet, and TV Spending
Your phone, internet, and TV bills might not be the biggest payments you have to make. However, this doesn’t mean you can’t negotiate a better deal with the provider or opt for a new one. Moreover, we live in an age of streaming services that are relatively cheaper than most TV packages. Therefore, you can remove the TV from your bundle if you don’t spend much time watching.
If you’re in the market for a new provider, research the best ones operating in your area, and see how they differ in terms of price and service quality. You also have to consider the installation fee, so choose wisely.
When calling your existing provider to cancel your subscription, never opt for their first counteroffer to get you to stay. Many companies offer more affordable packages immediately to stop you from choosing a competitor. You should tell them that you’re only doing this due to a strained budget. If they offer a better deal than the previous one, that’s great. If they don’t, you can take your business elsewhere.
2. Debt Consolidation
Debt consolidation is the process of combining all your credit card debt into one collective debt, so you don’t have to track multiple payments every month. Bundling debt is one of the smartest ways to improve your credit score, as it transfers all your debt into a new card with a relatively lower interest rate.
However, this doesn’t mean you should close your old accounts. Keep them open with little or no balance to increase your overall score. However, due to its lucrative benefits, debt consolidation has become subject to scammers who use people’s financial struggles for their gains.
Therefore, when looking for a company, ensure your options mention their pricing, terms & conditions, and expected results. As per the law, you should also know the penalties for delayed or forfeited payments.
Moreover, if you’re unsure if debt consolidation is the solution for you, perhaps you should speak with an experienced credit counselor to get professional advice on how to proceed with it.
3. Reduce Your Utility Bills
Utility bills (water, gas, and electricity) are the most common recurring bills most people have on their credit reports. However, there are ways you can cut down these costs. For example, you can opt for a solar system or more energy-efficient appliances and lighting to lower your electricity bills.
You can also conduct an energy audit to fix leakages and follow expert tips, such as lowering the temperature or keeping lights turned off during the day. Similarly, to save water, you can take shorter showers and hire an expert to check your plumbing for leaks and fix them.
Wrapping Up
The bottom line is that by learning how to use budgeting to improve your credit score, you can achieve your financial goals while building a healthier credit report for future loans and purchases. At the same time, you can save more money for emergencies and your post-retirement life so you don’t have to depend too much on your credit card.
However, we advise speaking to a financial expert to help you make better decisions when it comes to credit utilization and budget management.
