3 Ways to Improve Your Credit by Budgeting

The first step to a good budget is a good mindset. You want to pay down debt to improve your bad credit score. Therefore, you must be living within your means. This is an honorable state to be in and a budget is something you can take pride in.

1. Create a Monthly Budget to Improve Your Credit Score

Monthly Expenses

Since most bills are monthly, you will want to do a monthly budget. The easiest way to begin is to look at previous months’ finances. Ideally you can look at the last two years’ worth of records. If you don’t have these, work with what you have. Start by listing everything you spend and the amount in one of five different categories: housing, debt repayment, transportation, other living expenses, and savings. Add everything together to get your monthly expenses.

  • Your housing expenses would include your rent or mortgage payment (also taxes if they are not included in escrow), your utilities (including phone, gas, electric, internet, cable, etc.), repairs and household items, and insurance (renters or homeowners, if not included in your mortgage escrow).
  • Debt repayment would include any loan (other than your mortgage and car loans) such as credit cards, student loans, personal loans, and bank loans.
  • Transportation costs should include the car payment, auto insurance and repairs, gas, parking and tolls, as well as bus and train fares.
  • All of your other expenses would include food (groceries as well as eating out), clothing (including dry cleaning and laundry expenses), medical, hair care, gym memberships, child care and tuition, pet expenses, tithes or donations, and entertainment (books, magazines, moves, travel, and sports).
  • Finally, you will need a savings category for long term needs like retirement and college tuition as well as short term needs like holiday gifts and an emergency fund.

Money Coming In

Add up all sources of income. This needs to be on a monthly basis. If you get paid bi-weekly, you can multiply each paycheck by 26. If you are paid weekly, multiply your take home pay by 52. Include childcare, stipends, dividends, and any other source of consisten payment. Don’t include gifts unless you are guaranteed to get this amount on a regular basis. You can print out this sheet or create a spreadsheet in Excel or Google Sheets.

2. Do the Math

Subtract the income from the expenses. This number has to be greater than zero. If it is negative, or even close to zero, you need to start trimming expenses. Look first at the optional things such as cable TV, entertainment, eating out, and optional clothing purchases. If there aren’t any obvious cuts you can make, take a look at how much you’re spending in each category and what is each category’s  percentage of your total expenditures. An average budget is 35% for household expenses, 25% for living expenses, 15% for transportation expenses, 15% for debt repayment, and 10% for savings. If any of your categories are a higher percentage than these, you might consider looking closer at that category and seeing what you can live without.

Don’t Eliminate the Savings

You will need something to retire on. It is foolish to just declare that you will work until you’re dead when the reality is that most people in their 80s and 90s do not continue working, many because they are no longer capable of doing their jobs. If you have children, don’t sacrifice their education tomorrow for a family vacation today. Keep contributing to their college savings accounts. Someday they will be making their own budgets and it will really benefit them if their income is higher rather than lower. And an emergency fund is so essential. All it takes is a large unexpected expense such as the deductible for a medical emergency or a major car or house repair to really challenge your debt repayment plan. Avoid cutting down how much debt you are paying off. This will slow down the process of building up your credit score.

Look at Your Big Picture and Watch Your Credit Score Improve

Now that you have a good first draft of your budget, you can see the big picture a lot better. You can even make charts if that helps you. Building your monthly budget is a trying exercise but the results are worth it.

3. Update Your Budget Regularly and Raise Your Credit Score

Your financial needs may change. So may your income. You might have the ability to move to a less expensive place to live. You might change jobs. Having a budget can help you if you need to increase expenses or decrease income. You will already have a good idea how much you can move these numbers. You will also start keeping better records of your expenses so you can continue to fine tune your budget as you go on. This step puts you well on your way to paying down debt and improving a bad credit score.

TGUC Financial can help you with credit card refinancing and debt consolidation to make your debt repayment process move faster. Contact us today.