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Using a Budget to Eliminate Bad Credit

– Posted in: Managing Your Finances, Money Management, Smart Banking

Bad credit is a very difficult thing to live your life with. Virtually everywhere you turn financially, credit will be a part of the discussion. Budgeting is a great way to avoid bad credit, but it is a wonderful way to eliminate it as well. If you are already on the losing end of the credit battle, here are some tips on how to use a budget to get rid of it:

Using A Budget to Eliminate Bad Credit

Commit to not giving up when it gets tough

Before you even get started, make absolutely sure you are committed to seeing it through. Budgeting is not easy and it will be tough for a time. Hang in there and you will start to see your credit improve and your debt going down.

Create a debt profile

There are plenty of programs out there that can help you get organized, but a piece of paper and pencil still works as well. Sit down with your bills and write out the basics.

  • How much do you owe?

  • What rate of interest do you pay?

  • How long do you have to pay it off?

Once you  have it laid out in such a way, it is easy to see which items make the most sense to pay off first. Generally speaking it will be the ones with the lowest balances and the highest rates of interest.

Create a basic budget that sends something to everyone

Paying absolutely nothing to someone you owe money to is the worst possible thing you can do. If you are trying to improve your credit rating, you need to make absolutely sure you are sending something to all of them. Aim your biggest amounts and payments at the items that are costing you the most, but pay something to all of them.

Don’t wait till the last moment to balance your budget

If you try to pay your budget at the end of the month, you will probably find that you never hit the mark. Instead, watch your budget all the way through the month. This way you can adjust on the fly and fix things as you notice them. For example, if you notice you are running high on your food bill, you can cut back on the rest of the month to hit the mark. This helps you make your payments on time and your credit to improve.

Don’t make payments out of your emergency fund

When you think back to when you first accumulated your bad credit, it probably involved not having a proper emergency fund. You were not prepared for some emergency, and then you missed some bills due to that. Sounds familiar?

What good will it do to eliminate  your emergency fund to save your bad credit? That will simply recreate the bad habits that got you in trouble in the first place. Find a way to pay that keeps your budget intact. Get a part time job or pull from another area of your budget.

9 Comments… add one
Michele January 12, 2014, 12:35 am

Creating a budget as you have shown is not difficult-it is a matter of sitting down and being brutally honest with yourself–it is the sticking to it that is hard!! Great advice–Thank you.

amanda January 12, 2014, 5:43 am

Great idea -I do think it is important to not spend from your emergency fund.

Robin (Masshole Mommy) January 12, 2014, 7:15 am

I think this is great advice. I budget everything and so far (knock on wood) I have managed to keep things on track with my own finances. My husband was part of that federal shutdown we had here in the US last October, so it was a little rough when we didn’t get paid for three weeks, but we made it work :)

Vinma January 12, 2014, 9:43 am

Robin, sorry your family had to go through the recent US shut down. It is crazy but I am glad and proud of the fact that you didn’t lose your grip and that you guys pulled through it. I think its because of your careful budget planning.

Corinne January 12, 2014, 7:25 am

This is great advice, especially your tip to watch your budget all month rather than only checking it once a month. I understand your point about leaving the emergency fund intact, but my personal belief is that it makes more sense to pay off a high interest credit card with the money rather than leave it in a low-interest bearing account. Then, you can make payments to yourself to refund it instead of to the credit card.

Vinma January 12, 2014, 9:41 am

My idea of leaving the emergency fund alone comes from the habit of a person who turns to his emergency fund whenever things doesn’t go as planned. If he or she does this every time, that just plainly defeats the purpose of the fund in the first place. But your thought about paying off a high interest card also makes sense. I guess ,it is just a matter of when to stop taking money from the fund and the perseverance of starting the fund from scratch all over again.

katherine January 13, 2014, 6:50 pm

These are really helpful to me. I love saving money!

Karen Glatt February 17, 2014, 2:25 pm

I wish I would have known that my making such bad credit problems in my 20’s would haunt me later in my life. I have to pay higher insurance costs with my having bad credit. I make sure to stick to a budget and I do not overspend anymore! I have learned my lesson, and have gotten out of debt.

Shannon February 28, 2014, 5:12 am

I think credit management skills should be taught in schools.

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