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:
Learn to budget
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.
Live within your means
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.
Get out of the spending habit
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.