Creating a Budget That Has the Best Effect on Your Credit
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By Jeanine Skowronski
Most people set up a budget to bolster their bank accounts, but the best money plans take another important financial factor into consideration: your credit. A top-notch credit score can make it easier to get a loan — and help you save more money across the board, as this will help you qualify for better rates, terms and conditions of financing, insurance policies, cell phone plans and more.
To help you build a solid financial plan — and a stellar score — here are six tips for creating a budget that will have the best effect on your credit.
1. Prioritize Your Loan Payments
Missing a loan payment is the fastest way to damage your credit. In fact, a single missed payment can cause a good credit score to drop 100 points or more — and multiple missed payments will make it much more difficult to get financing in the future. That means your monthly mortgage, auto loan, personal loan or minimum credit card payment need to be top of mind when you draft your budget. Calculate how much you’ll need to cover these musts before you move on to your wants or more discretionary spending. As far as what debts to pay down first, you can find some guidelines here.
2. Don’t Count Your Credit Limits
Sure, you have a $5,000 spending limit, but that doesn’t mean you should consider that available credit as your budget for discretionary spending — or essentials. For starters, any balance you can’t pay off in full is going to accrue interest and cost you more long-term. Plus, high credit card balances can wreak havoc on your credit.
Charge over 30% of your total available credit limits and your scores will take a tumble. In fact, it’s generally considered ideal to keep your credit utilization rate (the amount of debt you owe versus your total available credit) below at least 10%. That’s why credit cards are best used on items you can pay off in full by their due date. And, if you’re particularly prone to overspending, only break the plastic out in case of emergency.
3. Set up Alerts
Budgets are all about balances and due dates and, these days, banks offer alerts that can help you keep an eye on both. Take advantage of text or email alerts that’ll let you know when a bill is about to come due, a credit card balance is climbing too high, your bank account is running dangerously low or a big charge posts to your statements.
4. Build Your Emergency Fund
Of course, there are times when making all your loan payments and keeping credit card balances low is easier said than done. One major car repair, medical bill or busted water heater can really deplete your bank account. And you’ll want to be prepared for even more strenuous money troubles, like an unexpected job loss or extended health issue.
That’s why it’s important to work an emergency fund into your budget. You generally want to have three-to-six months of savings on hand for when things go pear-shaped. You can get there by arranging for a certain portion of your paycheck to roll right into your savings account each month — even small amounts will eventually add up.
5. Identify Money Wasters
Your emergency fund will thank you. Use a free budgeting app to identify areas where you’re consistently overspending — like, say, all those restaurants you’re frequenting on weekends — then reroute those dollars to your savings account.
6. Find Other Ways to Cut Back
Some fixed expenses may not be as fixed as you think. Cellphone, cable and insurance plans can be renegotiated as can your credit card interest rate. And if your current service providers don’t want to give, you could always comparison shop to see if there are lower rates you could score elsewhere. Beyond that, some simple changes on your part can lower important monthly payments.
For instance, you can tackle shocking electric bills by installing dimmers, programmable thermostats and ceiling fans. And you can lower cellphone bills by lowering data usage, using a family plan or fixing bad credit (that’ll help you qualify for lower rates and/or skip certain fees.) Having extra dollars in your savings account will help you be able to make loan payments on time, keep credit balances low and avoid taking on more financing to cover expenses or, worse, existing debts.
Jeanine Skowronski is the executive editor of Credit.com. Her work has been featured by The Wall Street Journal, American Banker, TheStreet, Newsweek, Business Insider, Yahoo Finance, MSN, Fox Business, Forbes, CNBC and various other online publications.