How to Improve Credit When Living Paycheck to Paycheck

A man using a calculator while he holds a document.

Waiting for the next influx of money so you can stock the fridge, satisfy bills and cover your rent or mortgage payment is not only stressful, but it can lead to serious credit problems. Many people turn to credit cards and loans to make ends meet during tough times. However, doing so can lead to even worse anxiety as those bills come due—and your credit rating will take a turn for the worse if you can't pay.

It's time for a new and improved strategy. Here's how to simultaneously make ends meet and hike up your credit rating.

Step 1: Know Where Your Money Is Going Now

It's very important to obtain a precise idea of where your income has been going so you can determine what you can reasonably cut down. Unless you've been carefully tracking, there's a good chance that you've been spending more than you think, and possibly on non-essential expenses.

To get an accurate picture, use the Federal Trade Commission's Make a Budget worksheet. Plug in your monthly income and then fill out the categories for what you might spend on both a regular and an occasional basis. At the end, it will tally the result. If the figure is in the negative, you'll immediately understand why the paychecks don't seem to be coming in fast enough. That's OK. Consider it as a signal you need to make some positive changes.

Step 2: Close the Shortfall

As you'll notice, not every expense on the budget list is a crucial one. Return to the worksheet and start evaluating which you can feasibly reduce or even eliminate. Your aim should be to close the shortfall and, if possible, have at least a little cash left over for savings and emergencies.

For example, if you discover that you're running a $200 monthly deficit, but you've been spending more than that on a combination of dining out, entertainment and other non-necessities, shave those line items down to a reasonable sum. After playing with the numbers, follow through and make the required spending adjustments. Tightening your belt can be a challenge, but it'll be worth it in the end. It's certainly better than worrying about how you're going to pay your landlord. See "What Is the Best Way to Save Money?" for more tips on where to trim your budget.

Step 3: Don't Borrow Trouble

It's common for people who are experiencing financial stress to turn to credit products for relief. Resist. It's especially important to steer clear of such subprime products as payday loans and car title loans. Using them likely won't solve the underlying cash flow issue, their interest rates are excessive, and they come with severe consequences for not paying.

As for credit cards, be careful. If you start charging things you don't have the money for, you'll find yourself in an even worse position than you are today. "It's tempting to look at your lines of available credit as a lifeline, but it's a dangerous road to travel," says Bruce McClary of the National Foundation for Credit Counseling. You may not be able to meet the payment by the due date, which will be noted on your credit report and cause your credit scores to sink. And if all you can do is send the minimum payments but you keep charging, your balance will swell so it's near or at the credit limit, and that, too, will hurt your scores.

If you do charge, you can ensure the activity will help your credit scores rise by always paying the balance in full and on time.

Step 4: Increase Your Credit Rating

As you're working on closing the financial gap between paychecks by reducing expenses, focus on getting your credit history in a healthy place. Check your credit report and then take a look at your credit scores. Once you see where your credit is at, you can take steps to improve it.

Some actions you can take to increase your credit scores won't cost you a penny:

Clear up any errors. If you spot any errors on your credit report, you can dispute them for free. They may include evidence of fraud (such as credit cards or loans that you didn't open but now have an outstanding balance) or collection accounts that are older than seven years. Investigations take about a month, and if the data is removed, your credit reports and scores will automatically improve.
Add non-traditional accounts. If you have too little on your credit reports—called a thin file—because you don't use credit cards or have never taken out any loans, consider adding your cell phone and other utility accounts to your credit report with Experian Boost^®^ø, a free tool. When those on-time payments appear in your credit file, they will be calculated into your scores, often giving them an instant hike.
Be prudent about pursuing new credit products. When you apply for a credit card or loan, the lender will add a hard inquiry to your credit report. In general, these inquiries have a minor impact on a credit score. For a FICO^® Score^☉ , one additional credit inquiry might take less than five points off, but they have a greater impact if there's not much on your report.

Also concentrate on the actions that matter most to the credit scoring models: the way you pay and the amount you owe. Payment history has the biggest impact on your credit scores, counting for 35% of your FICO^® Score, so it's important to pay your bills on time every month.

If you already owe quite a bit on revolving debt such as credit cards, eventually you'll want to tackle that debt. After payment history, credit utilization—or your balances as a percentage of total available credit—is the second most crucial scoring consideration, so if you can bring your balances down, your scores should go up.

You can end the cycle of living paycheck to paycheck and at the same time ensure that your credit is in a healthy place. Does it require effort? Sure, but when you're finally meeting your bills and have built a credit history that will keep your opportunities open wide, it'll be worth it.

How Good Is Your Credit Score?

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How to Improve Credit When Living Paycheck to Paycheck

In this article:

Step 1: Know Where Your Money Is Going Now

Step 2: Close the Shortfall

Step 3: Don't Borrow Trouble

Step 4: Increase Your Credit Rating

Instantly raise your FICO^® Score for free

How Good Is Your Credit Score?

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In this article:

Step 1: Know Where Your Money Is Going Now

Step 2: Close the Shortfall

Step 3: Don't Borrow Trouble

Step 4: Increase Your Credit Rating

Instantly raise your FICO® Score for free

How Good Is Your Credit Score?

Resources

Latest Research

Latest Reviews

Instantly raise your FICO^® Score for free