How Does a Budget Help to Boost Your Credit Score?

Usually, budgeting has a very negative reputation. It is reserved for the people who are bad at managing money. But this is not completely true. Even those who are good at managing money, should create a budget and stick to it.

A budget helps to boost credit score and improve one’s financial life. And, this is irrespective of one’s capability to manage money like a pro.

Don’t believe me? Okay. Let me tell you how a budget can help to uplift your credit score and financial life.

1. A Budget Helps You To Pay Off Debt:
Debts have a symbiotic relationship with the credit score. The amount of debt you owe affects 30% of your FICO score. A budget helps you to pay off debts and improve credit score gradually.

A budget helps you to determine the exact amount you should allocate in various categories based on your monthly income. You can find out where you’re spending more and curb your expenses there.

When you’re in debt, your financial goal should be to get rid of unnecessary expenses, save as much as you can, and utilize it to repay your bills. A well-planned budget helps you to avoid making unnecessary expenses, save money, and use it to pay off debts.

Once you pay off debts and add positive payment history to your credit report, your credit score starts increasing gradually.

2. It Makes You Less Dependent on Credit Cards:
Effective budgeting can help you to correct your bad spending habits. It forces you to spend as per your means and be less dependent on credit cards. When you use fewer plastics and stay within your credit limit, your credit utilization ratio remains low. If you can keep your credit utilization ratio below 30%, then you can expect to have a good credit score.

When you use credit cards to pay outstanding utility bills and cover emergency expenses, your overall balance on credit cards also increases. Even if you make minimum monthly payments, that is not enough. Your credit utilization ratio would increase since your available limit is decreasing with each passing month.

3. It Helps You to Avoid Making Late Payments:
Online budgeting tools are quite user-friendly and effective. You can set alerts for the due dates of your credit card bills, utility bills, mortgage, auto loan, and other bills. This way you won’t forget the due dates and miss payments. Remember, late payments and missed payments drop your credit score. Plus, you have to pay fines and penalties to creditors for missed payments.

Budgeting helps you to pay your bills on time. When you have an itemized calendar in your budgeting app, it becomes easier for you to make timely payments. You won’t miss payments and get penalized.

What Else Does Budgeting Do?
Budgeting not only helps you to improve your credit score but it also helps you to save your house. When you don’t stick to a budget and live beyond your means, you fail to make payments on credit cards and mortgage. The consequence is disastrous.

Mortgage lender waits for a few months and then send you a foreclosure notice. Now the problem is, by the time you receive the foreclosure notice, the outstanding amount becomes so high that it’s almost impossible to pay the full amount. At that moment, your only options to save your home are loan modification and short sale.

In case of credit cards, when you leave them unpaid, creditors increase interest rate after a certain period and impose penalties. So you end up paying much more than what you originally owed.

Delinquent credit cards don't just appear on your credit report for 1 year. They remain on your credit report for the next 7 years. And if you file bankruptcy, to get rid of those debts, then it will appear on your credit report for 10 years.

Download a Good Online Budgeting Tool Now
Budgets are your road maps to financial success. I hope you have understood and accepted this fact by now. So instead of procrastinating, create an effective budget plan right now. If you don’t have any idea regarding where to start, then you can download an online budgeting app as soon as possible.

Mint is the most popular and practical budgeting app as it updates and segregates transactions automatically. It gives you a real picture of your spending pattern. The next best budgeting app is PocketGuard. It shows you how much money is left for paying bills and saving money.

Some Tips to Create a Smart Budget Plan

  1. List your financial goal you'd like to achieve
  2. Note down your expenses
  3. Calculate your monthly income
  4. Calculate how much is left after covering all your expenses

If you find that your expenses are more than what you earn, then it means that you have to change your spending plan and lower your expenses. You have to allocate a specific amount to each category and spend money accordingly. You have to allocate money in such a way so that you’re able to save money at the end of every month. As you go on saving money every month, you accomplish your financial goals one by one.

A budget helps you to track your income and expenses. It helps you to keep your expenses under control and safeguard your credit in the long run. Without a smart budget plan, it’s almost impossible to avoid financial potholes and traps.

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