Not too many people are aware of the damage their credit score can cause until they try to apply for something and get denied. Your credit score and history could ultimately make it much harder (and more expensive) for you to acquire the things you want most in life. Whether you’re applying for a job, home loan, or auto loan, your credit history has a significant impact on whether you’ll be approved (if approved, how much) and how much interest you’ll be required to pay.
The only way to minimize the damage that a bad credit score and history can do to your life is to learn how to better manage your finances accordingly. Below, you’ll find a few suggestions on how you can customize your personal budget to fit your lifestyle while also improving your credit score.
How is Your Credit Score Determined?
Before you can begin budgeting in a manner that will benefit your credit score in the long run, it is essential that you first comprehend how your credit score is determined. According to myfico.com, there are ideally 5 factors that play a significant role in the calculation of your credit score:
1. Payment History – Your payment history details how timely you are in paying your creditors. This counts for 35% of your credit score.
2. Credit Utilization – Your credit utilization rate is the amount of credit you’ve been approved for verses the amount of credit you’ve used on the account. This would count for 30% of your credit score.
3. Length of Credit History – the length of credit history is how long you’ve had credit accounts. This counts for a total of 15% of your score.
4. New Credit Accounts – New credit accounts refers to the amount of new accounts you’ve applied for and/or opened in a given period. This accounts for 10% of your credit score.
5. Credit Mix – The credit mix refers to the various types of credit accounts you have (i.e. installment accounts, credit card accounts, personal loans, etc.). This totals 10% of your credit score.
Based on the above information, you now know that in order to maintain a reasonable credit score you will need to:
· Make timely payments
· Keep your credit utilization percentage low (usually within 10 – 30% is a good percentage)
· Maintain good credit accounts for a long period of time
· Be mindful of how many new accounts you’re opening
· Keep a good mix of credit accounts
Review Your Credit Report
Now you have a general idea of what is required to maintain a decent credit score, you’ll need to determine which areas you need to work on personally. By reviewing your credit report, you’re able to see all of your credit accounts and determine which are in default or have late payments, which accounts have high utilization rates, how long your accounts have been opened, how many inquiries have been made in regards to new accounts, and what types of accounts you have opened.
Tip for Disputing Credit: A reputable credit repair company can help you to resolve any conflicts found on your credit report. By removing negative accounts from your credit report you could see a change in your credit score in just a few short weeks. Some credit repair companies, like Lexington Law, even utilize customer apps that allow you to instantly see all changes to your report from your mobile device.
Compare Monthly Expenses to Monthly Income
The next step would be to evaluate your monthly expenditures. In order to make an accurate budget that will also accommodate your lifestyle, you will need to have an up to date picture on your expenditures in relation to your income. Some monthly expenses might be the same such as your mortgage/rent, car payments, insurance payments, and utility bills, while others might fluctuate. Jot down everything that you pay for in a 30 day period.
After you have your expenditures you’re need to evaluate your spending on the monthly basis. Whether you do this by reviewing bank or credit card statements, or by securing receipts and calculating them, you’ll need an idea of what you’re spending. Now ask yourself, is your monthly spending less than, equal to, or greater than your income?
Find Ways to Cut Back
If your monthly expenses are equal to or greater than the amount of income you have coming in you’re going to need to find ways to cut back in certain areas to avoid going over budget. Going over budget leads to missed payments, high credit utilization rates (when you have nothing to spare you rely on plastic more), and frequent new accounts (when you’re hard up for cash you’re more likely to apply for new lines of credit). Cutting back might mean eating out less, utilizing ATM machines that have no fees, or finding discounts on monthly services such as your cell phone or cable bill.
Create a Realistic Budget
Now you’re ready to set your budget. Creating the budget is likely the easiest part. You’ll need to list all of your monthly expenses and how much you’ll need to cover those expenses. You can create your budget on paper, through excel spreadsheet, or with the help of financial apps. Any excess money should be put to good use. The first option is to put it towards any high balances to get credit utilization down or to improve your payment history. The other option is to put it towards savings or an investment account to grow your wealth. When setting your budget, be sure to leave room for error. You can never be too sure when a bill might be higher one month, or you have another expense that needs to be paid. Setting a budget too tight or strict can cause you to go over budget or stop budgeting altogether.
If you’re overwhelmed with credit card debt or any other types of debt, talking with a service provider (i.e. credit repair company, debt consolidation firm, the original creditors) is the best option you have for getting back on track before it overwhelms your finances. Your lifestyle doesn’t have to end as you’re trying to rebuild your credit, however, there will be some adjustments that need to be made to ensure that you’re on the right track. By evaluating your credit report, assessing and cutting back on your expenses, and creating a realistic budget, you’re sure to see significant improvements in your credit scores over time.