This post is sponsored by Lexington Law.
Wanna know a secret? There are some credit facts that work in your financial favor. All you have to do is make sure you’re taking advantage of them to improve your credit — trust me, your future self will thank you!
So what does budgeting to improve your credit look like? Here are four things that can be applied to your current budget that will help you improve your credit over time and help put you in a better place financially.
It might take some tweaking to make these fit in your current budget. I covered some guidelines for this in this post — How To Budget Your Paycheck. Think of these methods as an addendum to that — maximizing your current budget for improved credit. These tips will help you effectively create a budget that allows you to live the life you want while improving credit for the life you want to live in the future.
How To Budget To Improve Your Credit
1. Prioritizing debt payoff.
Your debt pays a big role in your credit score because of your utilization ratio. This ratio is calculated by dividing the amount of credit available to you by the amount of credit you’re using.
Say you have $20,000 in available credit and you’re carrying balances of $15,000. Your aggregate utilization ratio is 75%. It’s recommended to keep this number below 30% so that it does not negatively impact your credit score.
There are two types of utilization when it comes to your credit: aggregate and line item. Aggregate is the ratio of your total credit available and the total credit you’re using. Line item is per each individual line of credit. Low credit utilization is key to a good credit score!
So going off of the previous example, if one line of credit you have is $10,000 and you’re maxed out and using all $10,000, then your line item utilization is 100%. This is not doing you any favors when it comes to calculating your credit score — remember, your utilization ratio makes up 30% of your score calculation.
Reducing your debt to credit ratio as much as possible, or in the very least to below 30% of your total available credit, can help improve your credit score. Here’s a quiz on credit utilization to help you understand it better!
In your budget…
… put as much as you can towards debt repayment. Even doing so temporarily to get your utilization below 30% is worth the effort.
2. Make all of your payments on time.
Did you know that your payment history makes up 35% of your credit score? It’s the largest factor and carries a lot of weight in your score calculation.
Now, I don’t just mean your credit card payments. This is for everything that you have due because any institution you owe money to (like your landlord, for example) can report late payments to the credit bureaus. They might not always do so, but in cases like an eviction, it’s something you want to take very seriously as a judgement remains on your credit report for seven years.
On-time payments don’t have to be reported (and generally are not) so unless late payments are reported it’s just assumed you’re making your payments on time.
According to Lexington Law, a payment doesn’t become delinquent until the 30-day mark. That’s when creditors can report the late payment which can drop your credit score. The later the payment is, the more harsh the consequences become.
And while a single late payment might not impact your credit significantly, you’ll most likely be charged a late fee which is money you could have saved just by making the payment on time!
In your budget…
… make sure you have the cash to make all of your payments when they’re due. An emergency fund, we’ll talk about this in a minute, can also help you with any potential cash flow problems you might have. For example, say your paycheck is delayed a week for some reason but your rent is still due. Your emergency fund can help get you through.
3. Make multiple credit card payments every month.
Did you know that your utilization ratio can be calculated at any point during the month? So even if you’re paying your credit card balance off in full every month, you utilization ratio could still be calculated when you’re using more than 30% of your available credit.
Be mindful of your payment dates, too. I recently moved my autopay date on my credit card and my credit score dropped a few points. It took me several months to realize it’s because the utilization number was the balance of a month and a half, even though I was paying my card on time. Small things like that can have a huge impact!
In your budget…
… if you get paid twice a month or weekly, schedule credit card payments for the following business day. This will help keep your balances low and also keep you from overspending — a win-win!
If you have variable income or get paid once a month, take a more manual approach and check your credit card statement at the beginning of every week.
4. Put money in savings for emergencies.
You know what can be a huge financial burden? Having to dip into emergency lines of credit.
An emergency fund is there to cover emergency expenses like emergency tire replacement or a kaput hot water heater. It’s also there for you in case of loss of income. It’s how you’ll bridge the gap in the time in between jobs. Not having one can put you in between a rock and a hard place — AKA you’ll be missing payments and bills or leaning on emergency lines of credit to get you through.
Leaning on those emergency lines of credit, even for a month or two, can drop your credit score significantly. It puts your future in jeopardy because it can take significant time to rebuild your life while still paying off the debt accrued during that time.
To make sure you’re prepared, calculate how much you need in your emergency savings. The general rule of thumb is three to six months worth of expenses.
For this, you want to make sure you’ve covered for everything you have to pay for — including fixed and variable expenses. Then add 5-10% as a buffer.
For example, say your expenses are $2,500. Multiple 2500 by .05 to get your additional five percent. Double that to get your ten percent number. So 2500 x .05 = 125. So your expenses plus five percent is $2,625. Your expenses plus ten percent is $2,750.
So, three months worth of your expenses in this example would come out to be $8,250. Six months worth of your expenses would be $16,500.
No one is expecting you to have that saved up by next month, of course. But it’s a smart idea to sock some money away for when a rainy day comes. Of course the hope is that you’ll never have to use it, but you’ll be overly thankful that it’s there in case you need it.
In your budget…
… start setting aside $50-100 every month strictly for emergency savings. My preferred way to do things is to prioritize debt repayment until your utilization is below 30% while still saving for emergencies. Then, once your debt is below that ratio, you can throw additional money into your emergency savings account.
You might have to cut back in a few areas to make it happen, but doing things like a no-spend challenge can help you prioritize that.
All you need to do to budget to improve your credit is make a few tweaks to your current savings, spending, and repayment habits. Getting on the path to better credit and more financial freedom isn’t as hard as it might seem.
What’s one step you can take today to put you on the path to better credit?