Preparing a personal budget and sticking to it goes a long way to raising your credit score. Thirty-five percent of your credit score is calculated on your payment history--if you pay debts on time at the amounts to which you agreed. Another 30 percent of your credit score takes into consideration how much outstanding debt you have compared to the amount of income you bring in. Being in arrears with payments or maxing out your credit lines can cause your credit score to plummet. A budget lets you examine areas where you're spending money that you don't need to spend. This allows you to trim needless expenditures and use the extra money to get bills paid on time, every time, and even pay them off entirely.
Budgeting Basics
Step 1
Put it down on paper. If you haven't prepared a personal budget, this is a simple process. The financial advisers at Credit.com advise first collecting all of your bills, receipts and paycheck stubs. Then make two lists, one comprised of your fixed monthly expenses (such as rent/mortgage, monthly insurance premiums and installment loans) and another of your variable expenses (such as utility bills, credit card payments, grocery expenses, and recreation/entertainment).
Step 2
Add the total of your fixed and variable expenses and compare them to the amount of income you have coming in. If your expenses exceed what you have coming in, it's time to pare down your budget to make sure that all debts get paid in a timely manner. If you have money left over, that means that you're in the perfect position to pay off credit card balances (see Step 5).
Step 3
Take a hard look at what you can shave from your budget from your list of variable expenses. The Federal Consumer Information Center points out that in times when your financial standing isn't at its greatest; it's time to separate your "needs" from your "wants." Your needs include a roof over your head, food, clothing, health care, a way to get to work and back, and the love and support of family and friends. Your "wants," on the other hand are vacations, the latest electronic gadget, a cell phone, and lots of credit cards--all the things you see your peers owning that you feel you must have as well.
Step 4
Take whatever you shave from your budget--the "wants" that you purchase each month--and use this extra money to pay monthly debts on time. This may mean getting by on just the basics for a while. But the FCIC points out that eliminating $20 of unnecessary expenditures each week yield an extra $1,040 a year with which to pay your debts--which in turn gets your credit score up.
Step 5
If your budget indicates that you have money to spare, don't go on an impromptu spending spree--pay down credit card balances instead. There are two methods of doing this. Credit.com notes that you can pay off the credit card balance with the highest interest first, and then tackle the balance with the next-highest interest rate, and so on. Alternately, you can tackle the debts with the lowest balance, and then the debt with the next lowest balance. Always continue making minimum monthly payments toward all accounts while paying off superfluous debt.
Step 6
Don't be embarrassed to seek help if you can't budget to get your credit score up. Seek the services offered at a member agency of the NFCC instead. Your credit score won't be affected by the act of getting counseling alone; a certified credit counselor can help you develop a better budget tailored to your personal needs.
Tips and Warnings
- The National Foundation for Credit Counseling indicates that you should never spend more than 20 percent of your income on credit card bills or other loans, including a loan for your car. To raise your credit score, keep credit card balances at a minimum--the NFCC advises never using more than 30 percent of your credit limit.
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