Your credit score in some ways is meant to be a snapshot of your overall financial habits – especially your habits surrounding debts and other financial responsibilities. Developing some good financial habits can help your credit score by putting you in a good financial position.
Good financial habits will ensure that you don’t get into too much debt and that you are able to meet your financial duties easily. There are a few financial habits that are especially credit-friendly:
One of the biggest reasons that people develop poor credit is overspending. In many cases, this overspending is caused by a lack of budget. A budget can tell you how much you should be spending on each item in your life. This allows your financial life to stay nicely organized.
Contrary to popular belief, a budget does not have to be constricting or boring or complicated. Simply note how much you earn each month, and on a piece of paper, write down how much you really need to spend on savings, rent, utilities, food, personal care, transportation, spending money, entertainment, hobbies, education, and other items. Make sure that you account for every expense.
Then, simply commit yourself to spending that particular amount on each item on your list. Of course, some expenses on your list will change each month – you may spend more on heating bills in the winter than in the summer, for example – but estimating can help ensure that you can meet all your financial responsibilities.
Many people believe that if they only had more money, they would not have to worry about credit. In fact, this is not true. Many people who have money – or at least have all the trappings of money, including cars and nice homes – in fact have terrible credit.
The secret of this is that it is not your income that decides whether you are a good credit risk or a bad one but rather how you handle money. You could be earning $7 per hour and still paying your bills and meeting your financial responsibilities – in which case you will have terrific credit.
You could also be earning $300 000 a year and be in terrible debt and financial shape due to unpaid bills and excessive debt. The best way to ensure that you have a good credit rating – no matter what your income – is to spend less than you earn. That means living below your means. If you have a very small income, you may need to live with roommates in order to keep costs down. If you have a medium-sized income, that may mean saving more and entertaining less.
You may be interested to note that your income is not a factor in determining your credit score. Although your past and current employers are listed on your credit report – and although lenders may be able to guess your financial status from your loan amounts – your income does not count.
This means that if you won the lottery today or suddenly inherited a large sum, your credit score would not increase. With your credit rating, what matters is how you manage your money, not how much you make.
We are surrounded with advertisements that tell us to buy, buy, buy. When we want to read a book, we buy it. When we want to go somewhere, we take a cab or drive rather than walking.
Stopping spending consciously can be hard, but heading to your local library, walking instead of taking a car, buying a used computer instead of a new one – all can help you spend less and save more. There are several ways you can save money and pay off your debts faster by spending less:
1) When you head out, carry a small amount of cash with you and leave your credit cards at home. That way, you will not be able to overspend.
2) Stop catalogs from arriving at your house or discard them unread – advertisements and catalogues encourage you to spend and buy when you don’t need to.
3) Do it yourself. Eat in rather than dining out. Dining at restaurants or getting food delivered is always more expensive than doing your own cooking. Also, do your own taxes rather than farming the job out to someone else. Wash your own car, run your own errands, mow your own lawn. When you do something yourself, you spend less.
4) Watch less television. It sounds strange, but television can make you overspend – television contains many professionally-created advertisements pushing us to spend and spend. These ads are so well done that not spending after watching them is sometimes very difficult (just what advertisers want!). Switching off your television can help you avoid temptation.
5) Make do or do without. While you are repairing your credit, channel all your extra money into paying off debts and reestablishing good credit. Make so with what you have and avoid shopping as much as possible.
6) Buy discount or used. Whether it is furniture or shoes, you can save money by refusing to pay retail price.
Saving your money by spending less can let you pay off your debts faster, something that can improve your credit score dramatically.
One of the best ways to ensure that your credit rating stays good is to save money each month. Whether you are able to save $25 a month or $200 or even more, saving and investing your savings will prepare you for financial emergencies, will get you out of overspending, and will allow you to build investments that can help you in later years.
With savings at your bank, you don’t have to worry that sudden illness will make you unable to pay your bills, resulting in dings on your credit.
Saving ten percent of your income is a nice, reasonable goal. You can use your invested savings to make certain that your debts never get overwhelming. Most employers and banks will even deduct a certain amount of money from your paycheck or account each month to be put into investments.
This can be a very convenient way to save, as you are unlikely to miss or spend money you have taken out before you can get your hands on it.
Most people are surprised by how quickly their money seems to be spent. This is because impulse spending and small-change spending really adds up. Small-change spending is small spending we do without even thinking about it – buying a coffee or a newspaper we don’t need.
Impulse spending refers to simply buying things we don’t use or need. In both cases, we end up spending too much unnecessarily, and this is a problem in credit repair because you want to be channeling as much money as you can into savings and debt repayment so that you can repair your credit.
For a month, try keeping a daily record of every penny you spend – including the money you spend on phones, the money you spend on tips, everything. You will be amazed where your money goes. Keeping track of your money this way does two things:
1) It automatically cuts down on spending. If you have to write down where you spend your money, you will be much more careful what you spend your money on.
2) It allows you to see where you waste your money and take steps to stop the bad habit. If you notice that you always buy the newspaper on Saturday but never read it, for example, you can stop buying the paper on that day. Small savings can add up over the years and can put you in good financial shape which will be reflected in your credit risk rating.
-Do you have cable?
-Do you subscribe to lots of magazines?
-Do you build your DVD collection so fast that you can’t even watch all the movies you collect?
We all entertain ourselves with money, but most of us have at least one or two entertainments that we have either outgrown or don’t enjoy as much as we once did. Cutting that expense out and investing the savings can put us well on our way to saving for retirement or paying off our bills. If you give up your cable television, for example, you can pay off your credit cards that much faster, improving your credit score.
Whether it is buying a car, a home, or creating an investment portfolio, having assets can help improve your credit score by allowing you take out secured credit, or credit in which your assets are used as collateral.
When you take out secured credit (such as a mortgage) you enjoy lower interest rates and easier approval. As you repay your secured debt, your credit score will improve. Even better, lenders do look at the types of credit you have. If you have a mix of secured and unsecured credit, you will enjoy better risk rating scores as it will indicate that you have the means to repay your debts.
Building assets and capital is also a way of building financial stability which can help protect your credit score. If you have assets such as savings or investments, then you have a way of generating income or repaying debts in case of an emergency. You also have ready money you can use in case of unexpected medical bills or other problems.
While you are repairing your credit, you will want to channel as much money as you can into savings and debt repayment. For this, having a second income or even just a few hundred dollars a month more can mean that you get your credit into shape faster.
Having a secondary form of income can also keep your credit safe – if you lose your job, you can use the money you make from a secondary source to repay your bills until you find another form of employment.
There are many ways to get more income:
-You can ask your employer for a raise.
-You can start to sell something through the Internet or through a company.
-You can establish your own small business that can be tended to on the side.
-You can rent out part of your home to make some extra money.
-You can get a part-time or weekend job.
Whatever you do, finding an alternate source of income can help your credit immensely.
Few of us think about what would happen if we lost our jobs or suddenly became too ill to work. The thought is simply too terrible to contemplate in many cases, especially if we are living paycheck to paycheck with a job as it is.
The fact is, though, that financial emergencies happen to almost everyone at some point and they can have devastating impact in your credit. In fact, most people who declare bankruptcy do so because of a huge financial disaster such as sudden unemployment, huge medical bills, a lawsuit, or divorce. Despite this, few people plan for these problems, even though they can happen to anyone.
If you want to keep your credit score in good trim, you should know exactly what you would do in case of an emergency. Developing an actual written plan can help you by letting you take action to save your credit as soon as an emergency occurs. Some items that could be on your financial emergency plan could include:
1) A list of all assets you could liquidate if you had to.
2) A list of all extras or luxuries you could cut out of your life right away if there was a problem (i.e. newspaper subscriptions, cable television, water delivery service, Friday nights at the movies).
3) A list of any resources you have that could help you in case of an emergency. Maybe you know a lawyer who deals in financial facets of the law. Maybe you have insurance that could help you. Maybe your employer offers a severance package. Whatever it is, write it down. Keeping a list of these resources will make them easier to access in case of an emergency.
4) Other ways you could get money if you had to – jobs you could take, things you could rent out to others.
Talk to your bank and lenders about services they offer to keep you safe. Overdraft protection, for example, is a basic service that often costs nothing or very little extra but which protects you in case you withdraw too much money from your bank account.
With overdraft protection, you do not get a “ding” on your credit report or a charge for insufficient funds. In most cases, you get a day or two to add more money to the account to cover the gap. Some credit cards and other loans offer a similar service or offer insurance which protects you in case you lose your job and are unable to pay for a few months.
Insurance for health, your car, your home, and for liability can help you avoid the huge legal and medical bills that can occur from an accident or sudden problem. For a small monthly fee, you are covered against unexpected events that can drain your finances and leave you with out-of control debt.
Most bankruptcies are caused by the fallout that occurs as a result of business failures, law suits, health costs, and divorces. Getting a prenuptial agreement helps to ensure that a divorce will not adversely affect your finances and lead to a ruined credit rating (keeping accounts separate while married is also a good idea, as your spouse’s own financial troubles can all too easily become your own). Having a lawyers look over contracts can at least reduce the risks of unfavorable agreements that can put you at a disadvantage in business.