Budgeting apps can be nifty ways to track spending – but did you know that they can also help boost your credit score? No, this isn’t referencing a magic button or hidden perk that will instantly boost your score with little-to-no-effort.
However, when properly and patiently utilized a budgeting app really can have a significant impact on your finances – including your credit score.
The Challenges of Modern Finance
The world has come a long way from the barter system in the last few hundred years. Transactions like trading a donkey for a bushel of wheat and a few shirts have been replaced by exchanges of cold hard cash.
While you’d expect the widespread use of money to make things simpler, in many ways, the technological advancements of the modern world have created the opposite effect. Rather than simple bartering transactions, 21st-century life is dominated by complex concepts like electronic banking, automatic payments, and direct deposits.
If you’re going to use a budgeting app to improve your credit score, though, it’s important to understand a few fundamental aspects of both budgeting and credit scores themselves.
What is a Credit Score?
Before getting too far into the nitty-gritty, it’s important to lay some groundwork — especially when it comes to the concept of a credit score. Practically every modern adult is well aware of this mysterious financial figure that dictates how much money they can and cannot borrow. After all, everything from student and auto loans to getting a mortgage or even opening a credit card account hinges on that all-important credit score.
Nevertheless, truly understanding what a credit score is, in the first place, takes a little bit of explaining.
A Brief History of the Credit Score
Credit scores have been around since the 1950s when the Fair Isaac Corp invented the concept – that’s where we get the term “FICO” score from.
The goal of a credit score was and always had been to appropriately measure the credit-worthiness of an individual. Over time this concept was fleshed out until the FICO score became the industry standard nearly forty years after its invention.
Of course, the knowledge that having a “credit score” wasn’t normal until the 1990s may be interesting, but it doesn’t necessarily explain what goes into calculating the score itself.
What Goes Into a Good Credit Score?
When it comes to calculating a credit score, the process is anything but straightforward. While the specifics are wreathed in mystery, though, several important factors have been made clear over time. Here are some of the most important elements that factor into your score:
- Payment history: This is the most important factor, and it comprises roughly 35% of your score.
- Your total amount of borrowed money: The amount of money you owe makes up roughly 30% of your score.
- The age of your credit: The length of your credit history reflects 15% of your score.
- New credit: Things like opening up a new credit card can make up 10% of your score.
- Types of credit: Student loans, credit cards, mortgages, and other kinds of credit effectively impact around 10% of your score.
Much like a teacher grading a highschooler’s homework assignment, your credit score is calculated by considering all of these different elements and then cobbling them together into a total numerical score that is somewhere between 300 and 850.
How to Maintain a Good Credit Score
A good credit score is typically one that is 670 or higher. Along with budgeting, which we’ll discuss in detail further down, several financial activities can help you maintain a good credit score, such as:
- Regularly monitoring your credit reports from the three major credit bureaus – this is to identify mistakes and spot any negative trends in your spending habits.
- Consolidating your debt into a single, low-interest account – one single account is easier to manage and can look better on your report than keeping diversified debt that is spread across multiple accounts.
- Maintaining a good credit utilization ratio – you should try to only ever use roughly a third of your available credit.
- Having as few hard credit inquiries as possible – these take place during major financial events like getting a mortgage or taking out an auto loan.
- Keeping old and unused credit cards and lines of credit open and unused – this naturally increases your credit utilization ratio.
While these are all effective ways to either improve or maintain a good credit score, two more critical credit score maintenance techniques should always be considered:
- Making all of your payments on time.
- Avoiding taking on more debt than is absolutely necessary.
Fortunately, both of these powerful credit boosting activities can be addressed by using a budgeting app.
Using Budgeting Apps to Improve Your Credit Score
When working on your credit, the concepts of avoiding more debt and making your payments on time are always vital to sustained success. Both of these manifest in the all-important activity of budgeting.
What is Budgeting
Much like credit scores, the concept of a budget is a universal term. However, that doesn’t mean that this essential financial activity is always fully understood. If you want to create a bona fide, genuinely effective budget, you must:
- Start by calculating your entire income: This is typically done monthly and should include any income that you can count on receiving.
- Add up your predictable monthly expenses: This doesn’t have to be to the penny, but you should be well aware of everything from mortgage or rent payments to internet bills and even the approximate cost of things like food and clothing.
- Create financial goals: Things like aggressively paying off debt, saving up a rainy day fund, and investing in retirement are all important goals that should be clearly defined in your budget.
- Approximate your discretionary spending: Once you have predictable expenses, debt payments, and savings out of the way, decipher out how much extra money you can put towards things like entertainment.
- Make sure that your expenses don’t exceed your income: If they do, make adjustments where necessary, such as cutting out spending or picking up a side gig.
Once your budget is set, it’s important to both stick to and regularly review it. If you feel constricted by the predictable and controlled nature of a budget, you can also consider planned spending as an alternative budgeting option.
In either case, though, the act of fleshing out a budget that understands your income, expenses, and financial goals is an essential step towards healthy finances.
Using a Budgeting App
You can always use a pen and paper or even a spreadsheet to keep tabs on your budget. However, modern technology has provided a much more convenient way to track your spending: budgeting apps.
Some apps, like the YNAB budgeting app, focus fairly strongly on that crucial process of tracking your income and expenses. Others, like the Mint budgeting app, make it very easy to also calculate and see things like credit scores and retirement savings.
It doesn’t matter if you’re using an app to exclusively track spending or to maintain a comprehensive view of your entire financial situation. In both cases, using the app itself can help improve your credit score.
How Budgeting Apps Help Improve Your Credit Score
As has already been pointed out, the need to make payments on time and avoid taking on more debt are both essential steps in the process of improving your credit score. The former proves that you can be trusted to reimburse a lender on time and the latter demonstrates your ability to only borrow funds when necessary.
The simple act of seeing your financial status every time you record an expense can naturally help you remember to make payments on time.
In other words, the natural organization and structure that a budgeting app brings into your life will automatically improve your financial habits, which will organically boost your credit score over time.
Budgeting apps are often seen as little more than an app-driven version of a classic pen-and-paper activity. However, the ability to see your financial status at a moment’s notice, track every penny that you spend, and have a constant reminder of how much money you have left in your budget can all work together to improve your financial activity.
When you can use a budgeting app to rein in your spending and tend to your finances timely and regularly, it helps you establish beneficial financial habits. Given time, these will naturally impact your credit score for the better without ever needing a magic button or a quick fix to bail you out.