Improve Your Credit Score by Creating a Budget: Here’s How

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Are you looking for ways to improve your credit score, but are having no success? Well, your search ends here because in this article you’ll learn how to do it with a simple yet neglected method.

Budgeting.

Yes, budgeting. Before you dismiss it, the main question you should be asking yourself is whether you’ve been doing it the right way.

Budgeting has, over time, received a negative reception and is associated with people who don’t know how to maintain their financial lives. However, this is a myth. According to Gallup Poll, a staggering 68 percent of the respondents interviewed in the survey admitted to not having a budget. Only 30 percent revealed they had long-term financial plans regarding their investments and savings.

Regardless of how you look at the situation, these numbers are not in any way encouraging. By budgeting, you manage your finances better, and this helps you to improve your overall credit ranking. Take a look at how budgeting can work.

How not Having a Budget Hurts Your Credit

A budget is similar to a blueprint for a building or a map. It’ll show you what goes where and which road to take to get to a certain destination. In addition, a budget will help you avoid common mistakes that often lead many people into debt.

Without a budget, this is what you can expect:

·      Overreliance on credit – Yes, your credit card will pay your bills and other related expenses, but credit bureaus will see an increase in your credit utilization ratio. If it goes past a certain limit, then your score will take a hit. With a budget, you’ll know when the ratio reaches dangerous limits.

·      Forgetting due dates – Since you don’t have a financial plan, it’s easy to forget due dates on certain payments such as your cable, utilities, and other bills. Remember, late payment is terrible for your credit history and can lead to short-term installment loan up to 90 days to cover these bad financial things with not so attractive interest rates. Missing them, on the other hand, is catastrophic.

1.     Determine Your Goals

When trying to improve your credit score, it’s your finances that go under the magnifying glass. How much money you spend will depend on your lifestyle, and this is where many people go wrong. If there’s no solid financial plan, it’s similar to flying a plane without a destination.

Therefore, the first step is to list your primary financial goals. These goals fall under two categories. Long- and short-term goals. The latter are those you can achieve within a year or so, and they include paying off a debt. However, the long-term debt can take years because that includes things like paying the mortgage on a house or saving for retirement.

2.     List Your Expenses

This should be easy, but you must be honest if you want a positive impact on your score. According to Consumer.gov, the best way to go about this exercise is by jotting down your bills. Start with those with a fixed monthly or annual amount. They include rent and car insurance.

After that, list the expenses that vary from one month to the other such as groceries, dining, medical expenses, and entertainment, etc. You can use receipts to get a correct figure.

By organizing bills in this manner, you’ll know exactly where your money goes. This will, in turn, help you come up with ways you can trim your spending and stash the excess into a savings account. You can then use the money to clear outstanding debts and improve your credit.

3.     Establish all Income Sources

The main purpose of establishing your income sources is to know the exact amount of money you’ll work with each month. This is money from your day job, part-time or freelance work and all other forms of income.

Another reason why listing your income sources is vital is so you can determine your debt to income ratio. Remember, the debt to income ratio is one of the many factors used by credit companies such as FICO to determine your score.

By monitoring this factor, you can adjust your budget to suit your situation and clear any debt, enabling you toto climb the ladder to a successful ratio.

4.     Craft a Spending Plan

After determining your income sources and listing your expenses, it’s time to craft a new spending plan. This is how you’ll spend your money moving forward. First, start by allocating new figures to your expenses and then follow up by setting spending limits for each expense.

This will help you stay on budget. However, if you find this process a bit overwhelming, you can try using the 50:30:20 approach:

·      Set aside 50% to cover fixed-expenses such as your bills and other debt-associated items, including credit cards

·      Clothing, entertainment, and gifts will take up 30 percent

·      Investments and savings will take up the remaining 20 percent

Note that this is a general approach, and it may not work for your lifestyle. However, this will guide you when crafting your own budget.

5.     Cut Back on Your Spending

Chances are you’re among the 78 percent of Americans living from paycheck to paycheck. This means you don’t have any leftover money to set aside as savings or an emergency fund. While poor pay may contribute to this situation, your spending habits is also a great contributor.

This why you must go through your expenses and find areas you can cut back spending or even eliminate the expense altogether. For example, do you really need to eat out? Is cable TV a necessity? Cut down on your credit card use to maintain low debts.

Implement frugal living, and you’ll be surprised at how much money you’ve been throwing at unnecessary stuff. Such cutbacks will be painful because they’ve developed into habits but keep the main objective in mind. After clearing the debts and improving your credit, you can incorporate a few luxuries.

6.     Stick to Your Budget

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It makes no sense at all to create a budget only to abandon it midway. Sticking to your budget is crucial if you’re to achieve your financial goals. Follow these simple tips and you’ll have an easy time sticking to your budget:

·      Adjust if necessary: You budget doesn’t have to be fixed and unchanging. If you feel the situation call for a different budget, then go ahead and tweak it to suit the current situation.

·      Simplicity is key: This is true, especially when listing your expenses. Instead of listing every item individually, create a category that contains various, similar items.

·      Keep an eye on your goals: When creating your budget, the first step was to identify your financial goals. Always keep an eye on them and track them once in a while to see whether you’re still on track.

7.     Use Budgeting Tools

Sometimes tracking your spending can be an uphill task. This is where budgeting tools come in handy. You can find several free mobile apps, which can help you track your spending and remind you when to save.

Budgeting doesn’t have to be a painstaking affair, especially when you have these incredible tips on how to create a budget. With the possibility of a recession always present, it’s important to have good credit in order to access your money if you need it.