If you’re someone who has a history of bad credit, setting up a budget may be a wise move for you financially and may help you get on the path to improving your credit.
What Is Budgeting and Why Is It Important?
A budget is a powerful tool used to track your income and expenses, monitor your spending, and build your savings. Budgeting is important because it puts you in control of your finances by enabling you to set financial goals, manage your finances to meet said goals, and avoid financial pitfalls along the way.
A significant number of American households don’t have a budget or savings plan in place. According to a Debt.com survey, 33 percent of families are not on a budget. In addition, a 2017 GOBankingRates survey found that less than half of Americans have $1,000 in savings. Putting together a budget for your household puts you in a better position to build savings and prevent overspending.
How Can Budgeting Improve My Credit?
Budgeting gives you a clear understanding of what you can or can’t afford. Operating on a budget makes you more financially disciplined and less likely to overspend, which is how many people get caught in the bad credit cycle. You can improve your credit through budgeting by:
Outlining your bill due dates
A proper budget should outline the exact dates that all of your bills are due (i.e. mortgage or rent, car payment, insurance, credit cards, utilities, cable, etc.). Since making on-time bill payments can improve your credit history, setting reminders and keeping an itemized bill payment schedule as part of your budget plan can help you avoid late or missed payments.
Reducing frivolous spending
Spending beyond your means is a surefire way to accumulate debt and fall into the bad credit trap. One of the first things you want to do when setting up a budget is subtract all of your recurring expenses from your monthly earnings. The number you end up with should be a positive value. If it winds up being less than zero, you may be overspending. Setting spending limits can be an effective way to prevent overspending and have money left to allocate towards paying down debt, saving and/or investing.
Paying down your debts
Once all of your monthly expenses are accounted for, you can allocate a portion of your discretionary income (money you have left over) towards any outstanding debt you may have (i.e. credit cards, student loans, etc.). Incorporating a debt payoff plan into your budget may improve your credit history because it allows you to put money towards paying off debt balances that may be impacting your credit score.
Increasing your savings
Allocating a portion of your discretionary income towards building up your savings can also help improve your credit. Having money stashed away for a “rainy day” or a down payment on a car or home makes you less likely to need to borrow money for a purchase. If you don’t already have a savings account, setting one up is a good step towards financial well-being. There are some banks that only require a minimum of $25 to open a savings account and some don’t have any minimum requirement at all. The key is to make sure you’re saving something from every paycheck.
If you’re on a journey to improving your credit and are in the market to purchase a vehicle, a dealer enrolled in the Credit Acceptance auto finance program can help you get approved for vehicle financing. Simply fill out the Start Your Credit Approval form on our website and get connected with three of our enrolled dealers near you to get started!