Why Budgeting Is Important for Building Credit

Lamine Zarrad
March 28, 2022
3 mins

If you want to improve your financial wellbeing, there’s no better place to start than with a monthly budget. Budgeting helps you take control of your financial reality and use money responsibly. Plus, it can positively impact another important part of your finances: your credit score. 

Let’s take a look at why budgeting is important for building credit, and a few popular strategies to get you started. 

1. Budgeting helps you stay current on your bills 

Budgeting helps ensure you’ve got enough money in the bank to pay your bills on time. This matters, because many creditors penalize you for late payments. This can add to your financial burden and make it harder to meet your monthly expenses. If your bill goes unpaid long enough – it can also have serious consequences for your credit score. 

When does a late payment affect credit?

Creditors can report delinquent accounts to the national credit bureaus once they are 30 overdue. But you may be charged fees or penalties for payments as little as one day late. Your repayment history is the single most important factor in your credit score, which is why budgeting is important for building credit. 

2. Budgeting is important for growing your savings 

Budgeting helps you take control of your spending and achieve financial goals – including growing your savings. Your savings account balance doesn’t affect your credit score directly. But if you have a healthy savings account, you can use these funds for financial emergencies instead of taking on more debt.

What is the treadmill effect of credit card debt?

The more debt you take on the harder it is to break your reliance on credit. That’s because the more you borrow, the more you pay in monthly bills and interest payments. If this impacts your ability to cover your monthly expenses, you’ll need to turn to credit over and over again. It’s another big reason why budgeting is important: you can save money and get off the treadmill of debt. 

3. Budgeting helps you pay off your debt

Maxing out your credit cards isn’t just stressful – it hurts your debt-to-credit ratio. Also known as your credit utilization rate, this refers to how much debt you carry compared to your total credit limit. As a rule of thumb, anything above 30% negatively impacts your credit score. When you budget, you can devise specific strategies to off your debt fast. 

How do you budget to pay off debt fast?

One popular way to pay off debt fast is called the snowball method. With this strategy, you tackle your smallest balance credit debt first (while making minimum payments on the rest). Once you eliminate that balance, add the amount you were paying to the minimum payment of your next lowest debt. Keep working your way up until you’ve snowballed your way to zero debt.

4. Budgeting improves financial decision-making

Budgeting is important because it provides critical insight into your monthly spending and expenses. This improves your financial decision-making. You’ll know if you can afford another loan payment, say yes to leisure spending, or where you have opportunities to reduce your monthly expenses. 

This helps you stay on top of your financial goals – so you can pay your bills on time, save money, and continue paying down any outstanding debt.

The best budgeting strategies

There are plenty of reasons why budgeting is important for building credit. But there’s no single budgeting strategy that works for everyone. Explore these tried-and-true budgeting strategies to discover the best approach for your financial situation and spending habits. 

Zero-Based Budgeting

With zero-based budgeting, the goal is to have no excess funds available at the end of the month (but in a good way!). Each month, you allocate your entire income for expenses, debt payments, and savings – down to the last penny. This strategy works well if you’re on a tight budget and need to be very conscientious of where your money is going. 

Envelope System

With envelope budgeting, you label envelopes with specific spending categories (like rent, student loan payments, or credit card bills). On payday, you allot a certain amount of cash to each envelope – ensuring you’ll have the funds when the bills come due. This strategy works well if you tend to overspend and miss bills or savings goals. 

50 - 30 - 30 Budgeting Strategy 

The 50/30/20 rule simplifies budgeting by dividing your after-tax income into just three spending categories: needs, wants, and savings. You can modify the percentages based on your personal goals and financial reality. This is best if you want to be smarter about saving, but don’t want to itemize your monthly expenses. 

Pay Yourself First 

The Pay Yourself First method is simple – you pay yourself first. On payday, immediately direct a set amount towards your savings account or debt payments. You’re free to use the rest for wants and needs. This method works best if you have wiggle room in your budget – but your spare cash seems to disappear before you put it towards your financial goals. 

Don’t settle for anything less than Stellar credit

Following a budget makes it easier to pay your bills responsibly. But aside from loans and credit card payments, paying your bills on time doesn’t usually help your credit score. 

Now, you can build credit with the bills you pay each month already. With StellarFi, simply link your monthly expenses - from your rent payment, to your internet bill, and even your FabFitFun subscription - and get started building a positive repayment history. 

It only takes a few minutes to get started.

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The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.

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