Your credit score plays a big role when you apply for personal loans, home loans, or even credit cards. To enjoy easy approvals, lower interest rates, and better repayment terms, having a high credit score is a must. However, a lot of people don’t know how they can improve their score when it’s below par. More importantly, few people understand the relationship between credit score and a budget plan.
How a Lack of Budget Can Hurt Your Credit Score
Expense management and budgeting are usually associated with individuals that lack the basic personal management skills or live a financially stressful life. However, that’s just a myth that’s preventing the people from developing good financial habits and improving their credit score.
A comprehensive and well-thought-out budget plan can do wonders for just about anyone who wants to enjoy a comfortable life and increase their creditworthiness. In the same way, a lack of such a plan can hurt your credit score in the following ways:
- It’s easy to forget the due dates of your credit card bills and EMIs when you are not on top of your finances. However, delayed payments aren’t only bad for your credit score, they affect your loan applications too.
- When you don’t know how much money you are actually saving every month, or if you are saving at all, then you can end up using your credit card more frequently that you are supposed to be. Now, there are plenty of good credit cards for people with fair credit that offer low interest rates and a variety of perks. However, as you start increasing your credit utilization, you can hurt your credit score and lose all the benefits over time.
- With no budget plan in place, you are likely to make a lot of financial mistakes which may result in penalties and debt accumulation, neither of which are good for your credit score.
Creating a Perfect Budget Plan for Credit Improvement
There are various steps you can take to improve your credit score which include reviewing your credit reports, setting up autopay for your credit cards, lowering credit utilization, etc. However, creating a good budget plan alone can greatly help you control your finances and give a boost to your credit score.
To create a personalized and effective budget plan, take the following steps:
1. Set the Goals
To care for something, you must have a clear goal in mind. So, before you create your budget plan, you must establish some of your most important financial goals which could be buying a car or house, saving money for retirement, etc.
You can have both short-term and long-term goals which is actually recommended as it will make your plan more detailed and watertight. Just be sure to associate each goal with a date and financial target.
2. List Your Expenses
Your monthly expenditure is one of the most important parts of the budget. So, it’s important that you itemize all your expenses so that you know exactly where your money is going.
You can divide your expenses into two categories:
- Fixed: These can include home rent, insurance, EMIs, cable and Internet bills, etc.
- Variable: These include groceries, transportation, entertainment (movies, clubbing, etc.)
3. Identify all the Income Sources
Count every single source of income you have. You can start with the primary source income which could be your day job or business, and then list other sources as well which could be freelance work, blogging, etc.
4. Deduct Expenses from Total Income and Create a new Spending Plan
Subtract your expenses from the total income. The number you get after that is the amount you are saving every month. If the number if negative, it means you are spending more than you are earning which is certainly a cause for concern and warrants an immediate action.
To allocate your money wisely, it’s best to follow the 50/20/30 rule which can help you get out of debt and save money. Here is how it works- when you receive your income, you divide it into three categories which are needs, savings, and wants. Each of these gets a fixed portion of the money.
Needs: 50%
Half of your income must be set aside for the essentials which include food, rent, minimum payments for credit cards, transportation costs, etc. However, it’s important that you don’t mistake a “luxury” for “need”. For instance, movies, vacations, dining out, etc. are luxuries and not necessary for survival.
Savings and Debt: 20%
You want to keep 20% of your income for savings and the repayment of existing debt. The debt includes car loan, home loan, etc. It can also include investments like mutual funds and bonds.
Wants: 30%
What remains of your income now which is 30% is for yours to spend the way you want. This is the money you want to spend on the things that make you happy. So, you can use it for shopping, vacations, and luxuries like an expensive TV, DLSR camera, or maybe a video game console.
5. Use a Budgeting Tool
Even after you have created a top-notch budget, it can be difficult to record and track all your expenses and payments with accuracy. Thus, a budgeting tool is highly recommended. There are a variety of such apps and services available on the web. However, some of the best budgeting apps have the following features:
- Credit score tracking
- Investment tracking
- High security
- Mobile support
- Plenty of customization tools
- Detailed reports
So, this was a comprehensive guide on how to create a good budget plan that can help you save as much money as possible and increase credit score easily. However, it only works if you are committed and willing to work for it. Good luck!
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