4 Ways Your Credit Score and Budget Are Connected

in Personal Finance

This is a guest post written by our friend, Bethy Hardeman for Credit Karma

Just what does your budget have to do with your credit score? Well, a lot, actually. In most cases, the better your credit score, the more breathing room in your budget. Let’s take a look at four ways your credit score and budget are connected.

Your installment loans help you build credit.

When building a budget, you tend to start with the big things, like your mortgage and auto loan. These loans can be a pain; for many of us, they take up a large portion of our paycheck.

But your mortgage and car payment are doing something else for you: they’re building your credit. They’re called installment loans because you pay back a regular “installment” each month over the life of the loan.

One of the most important factors of your credit score is your percentage of on-time payments. Basically, a high percentage shows lenders that you pay back your debts responsibly and consistently. A lower percentage says exactly the opposite—that you’ve struggled in the past with making on-time payments.

To-do: Since your installment loan payments don’t typically change from month-to-month, schedule a regular payment each month about a week before it’s due. That way, your on-time payments percentage will remain pristine.

Not budgeting for your utility bills = trouble for your credit.

Your utility payments aren’t typically reported to the credit bureaus, so they don’t factor into your credit score. Paying these bills on time won’t help you build credit. However, if you default on your utility of cell phone payments, that bill could eventually be sold to a collections agency. Collections accounts are reported to the credit bureaus, and they negatively affect your credit score.

So even though these payments won’t benefit your credit, you should make sure they are worked into your budget.

To-do: Just like your mortgage or auto loan payments, schedule these payments. If they vary widely from month-to-month, set up calendar reminders so that you never miss a payment.

Paying down your credit cards helps reduce your credit utilization rate.

Another important piece of your budget is paying back debts. For many of us, that includes credit card debt. According to the latest Credit Karma data, 80 percent of Americans have credit card debt. On average, we’re each carrying $5,403 across five credit cards.

Just like with installment loans, making your credit card payments is important to keep your percentage of on-time payments high. But there’s another credit score factor that comes into play with credit cards: your credit utilization rate. This percentage compares your current credit card balances to your overall credit card limits. For good credit health, it’s best to keep this percentage to less than 30 percent at all times. If you’re paying back a lot of credit card debt, that might mean paying more than your monthly minimum to get those balances to less than 30 percent.

To-do: Add together your total credit card balances. Divide that number by your total credit card limits and convert it into a percentage. If it’s more than 30 percent, increase your monthly credit card payments to get it down below 30 percent.

A good credit score can get you lower interest payments.

Paying interest is no fun. Over the life of a mortgage, you’ll end up paying thousands of dollars in interest alone. But since interest is factored into your monthly payments, it becomes a part of your budget, whether you realize it or not.

What’s the best way to lower your interest payments? It starts with a good credit score. If your credit score wasn’t great when you were approved for credit—whether a home loan or your credit cards—you probably didn’t get the best interest rate.

To-do: Check your credit score on Credit Karma. If you’re in better shape then you were when you received your loans, consider refinancing for a lower interest rate. If not, spend some more time building your credit first. Find some clever ways to improve your credit health.

Ryan Bales

About Ryan Bales

Ryan is the Founder and CEO of Bync, which he founded in 2012.

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{ 2 comments… read them below or add one }

Allie Marguez September 28, 2012 at 5:01 pm

Although I always told myself that I need to buy only what I need, I think this model is just awesome. you need to go! LOL . A dual core processor for a phone? Wow.What will they think of next!


onemansmoney October 5, 2012 at 8:36 am

This is clever… I really like it. I’ve been spending a little bit of time thinking about credit ratings and the like after i recently destroyed mine in under 5 minutes ( if you’re interested in seeing just how I did that.

I got particularly screwed up on the utilization rate. I thought lowering all of my available credit would be helpful – i costly mistake!


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