How Your Budget Can Help You Build Credit

The building blocks of a healthy financial life are all tied to your budget — how much money is coming in, going out and where is it being used? Answering those questions and creating a budget that works for you can have a ripple effect on the rest of your finances.

Specifically, a good budget can help you maintain or build a great credit score, which can actually help your budgeting in the future, since a good credit score can save you tens of thousands of dollars over your lifetime (the lifetime cost of debt calculator can show you just how much).

Here are two key ways that your personal budget and your credit score are connected, and how you can ensure that your budget helps improve or maintain good credit.

Your Cash Flow & Payments

Here’s where we get into the sneakiest part of your budget — where your money is being spent.

Having the money to pay your bills on time every month is a key part of budgeting, but it also has a major credit score impact since payment history makes up 35% of your credit score.

Of course to pay bills on time, you’ll need to have the necessary money in your checking account and you’ll need to be organized enough to make your payments as agreed each month. To make sure the money is there when a bill is due, take a close a look at your cash flow. How often are you paid? What are your fixed monthly expenses? How much money do you have leftover each month for savings? Do you have money set aside for an emergency fund or must you rely on credit cards to get you through a tough financial time?

Creating a budget that allows you to live within your means, pay your bills, meet your current credit obligations with ease and build up savings for future goals will help you in the long run.

Making mobile and online payments is a quick way to pay monthly bills. You can automate your payments as well, though it’s always wise to double-check that payments go through and that you’re not overdrawing on your bank account.

Need help remembering due dates? Signing up for email and text reminders of upcoming due dates will help you stay on track.

How You’re Using Your Credit Cards

For some budgeters, tracking their spending is easiest on their credit cards, since their transactions are digitally recorded and you don’t have to go through the hassle of keeping receipts or recording your purchases. But that convenience may come with a cost — if you charge everything to your credit cards to track your spending better, you risk overspending, which can hurt your budget and your credit simultaneously. Here’s how.

The budget impact is obvious — if you overspend on your credit cards and have to carry a balance over to the next month, you’ll pay interest on that balance until you can pay it off. That eats away at your budget since it takes money from your savings or other budget categories to pay off the debt.

Carrying a balance on your credit cards won’t in itself hurt your credit score, but increasing what’s called your “credit utilization” — which makes up almost 30% of your credit score — may.

Your credit utilization measurement calculates the amount of revolving credit card limits that you are currently using. It measures the credit utilization of each credit card account that you carry, plus the total credit limits and balances of all revolving credit card accounts on your credit report. So if you carry a balance on a credit card, then continue to spend as usual on that credit card, you’ll eat up more of your available credit and raise your utilization. Keeping credit card balances at less than 30% of your credit limits is a good rule of thumb, though less than 10% is an even better goal to strive for. You can see how your credit utilization is affecting your credit by getting a free credit report summary on Credit.com.