Budgeting (MP) Typically, for most people budgeting is not at the top of our checklist – of things to do. Yet, most may not know without budgeting it isn’t possible to lower their credit score. Did you know – an incredible 60 percent of Americans don’t keep track of their expenses, according to one LendingTree poll. And only 30 percent said they have a long-term financial plan to lay out their savings and investment goals. This is all due to a lack of budgeting.
If you compile a bunch of credit card debt and then fail to pay it back, you’re going to hurt your credit score. And having the money to pay your bills on time every month is a key part of budgeting, but it also has a major credit score impact since payment history makes up 35% of your credit score.
Why not budgeting hurts your credit score?
The three credit bureaus track your behavior to check out what your credit utilization ratio is — how much credit you use in relation to your credit limit — and if it’s too high. Proper budgeting can make sure more balanced use of your credit cards and prevent damaging your FICO score.
1. Overspending – Whenever you spend too much during the month and credit card bill are due – you’re in trouble. Overspending unnecessarily results in not having funds available to pay your bills.
2. Payment history – Thirty-five percent of your credit score is your payment history. Consistently being late on your credit card payments will hurt your credit score. Pay your credit card bills on time to preserve your credit score
3. Late payments – A proper budget outlines the exact dates your auto loan, mortgage or rent, credit card, utilities, cable, along with other bills are due. Estimating those due dates and paying your creditors late is bad for your credit history, thus you credit score.
4. High credit card balances – Pay down any credit cards that carry a balance of more than 30 percent of your total credit limit. Your credit score is certain to take a hit if you max out a credit card or use more than 35 percent of your available credit. It doesn’t matter whether you choose to pay down the credit cards with the highest interest rates or smallest balances first.
5. Over the limit – Maxed out and over-the-limit credit card balances keep your credit utilization 100%. This is least ideal for your credit score.
6. Not paying the minimum amount – you don’t pay at least the minimum amount due, your creditors will eventually report your account as past due, which can damage your score. Budgeting properly allows you to have the money ready to pay your minimum.
7. Opening multiple lines of credit – Individuals who don’t budget realize a little too late that they can’t afford the payments on multiple credit cards. Budgeting allows you to know how much money you have available monthly to handle how many cards you can afford in the first place.
What can you do?
Just do the exact opposite of the five point above and read my “10 Steps to Creating a Personal Budget.” Also, it is important that you have the necessary money in your checking account and you should be organized enough to make your payments as agreed each month. To ensure the money is there when a bill is due, take a close a look at your cash flow. How many times are you paid? What are your fixed monthly expenses? How much money do you have leftover every month for savings? Do you have money put aside for an emergency fund or must you depend on credit cards to get you through a tough financial time? These are generally the questions you must face and answer honestly.
Creating a monthly budget will allow you to live within your means: pay your bills, and meet your current credit obligations with ease. It will help you build up savings for future goals and help your credit score. The budget impact is obvious on your credit score, now let’s take action and do something about it.