Budgeting helps you track your spending, save for retirement, and stay aware of your overall financial standing. But did you know it could also lead to new financial habits that can help boost your credit? Check out these ways re-adjusting your budget can up your score.
1. Lower your utilization ratio
Your credit utilization ratio is the percentage of your credit limit that you actually use. Ideally, you want to keep it at around 30 percent or lower. If you have existing debt, reworking your budget can help you find ways to put more money toward your payments, lowering your overall balance and, therefore, decreasing your utilization ratio (assuming you’re not still charging!).
Even if you haven’t accrued lots of credit card debt, you should still keep you utilization ratio down. To give you an idea of how it’s calculated, look at this example:
Let’s say Credit Card A has a $5,000 limit, Credit Card B has a $2,500 and Credit Card C has a $500 limit, giving you a total limit of $8,000. Every month, you charge (and pay off) $2,000 in expenses, bringing your utilization ratio to a nice 25 percent. Now, let’s say you decide to close the Credit Card B (the one with the $2,500 limit) because it’s one that you never really use. Your credit limit has now dropped to $5,500, but your spending has stayed the same, causing your utilization ratio to skyrocket to more than 35 percent.
Editor’s Note: According to Tom Quinn, FICO’s credit expert, keeping your utilization ratio at an even lower percentage, say 20% or lower, will enable you to maximize your credit score.
2. Get out of debt faster
A whopping 30 percent of your credit score is based on the amounts you owe. As a result, one of the best things you can do for your credit is to get out of debt as quickly as possible.
You can expedite that process by reworking your budget to allow for making larger payments toward your credit card balance. Examine your budget to see if there are areas where you could cut back on spending, like dining out, entertainment and shopping. Instead, put that money toward your debt.
3. Improve your payment history
Making on-time payments accounts for 35 percent of your FICO score, which means it’s essential to pay your bils on time. Looking at your budget to ensure you’ve created enough room for every last one of your bills. If you can, set your bills on auto-pay so you know the payments are on time. If you don’t feel comfortable using auto-pay, consider using a bill reminder and account management service, such as Manilla.com, which will send you automatic reminders when your bills are due so you never pay late fees and maintain good credit.