Being Frugal and Credit
Being Frugal is not a new concept. The term has been around for generations. And although the term has been synonymous with being cheap the two are completely different.
But what is Frugal? Frugal is defined as sparing or economical when regard to money or food.
So how did Frugal become something negative and can Frugality actually help your credit score?
Well the first part of the proposed question is easy to explain. The unfortanate truth is many who practice frugal habits tend to be considered cheap.
The second part to the question we will explore throughout this article.
Let me start off by stating that no one likes a cheap person and the idea of being cheap rubs everyone the wrong way. However It must be emphasized that being frugal is not being cheap. When one is cheap they are typically behaving in a subpar manner. They are looking for less quality on items, giving less for good service, and overall a negative spendthrift.
On the other hand, frugality allows you to build sound money management practices which typically translates into positive credit impacts. In fact so much so I am going to outline 5 direct benefits which applied will improve your overall credit and credit score
Benefit # 1 Developing a Money/Wealth Mindset.
The core principle of frugality is being thrifty. By being thrifty you keep your spending in check. By watching your spending you will avoid taking on unnecessary debt. Without unnecessary debt you will not rack up credit card debt. As you see each principle builds on the other each forming positive outcomes laying out the foundation of a money/ wealth mindset.
Benefit #2 Avoid Interest Payments
By being frugal you never want to pay more than you have to for a particular item. Avoiding interest payments will be second nature by embracing a frugal lifestyle. Since credit card interest increases the overall cost of any item you will tend to make your credit card payments on time. In fact you will put more emphasis on paying off the balance instead of allowing fees and interest to accumulate. If you are building your credit the practice of avoiding interest payments and paying the balance off will in time improve your credit score.
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Benefit #3 Building an Emergency Fund
You need Capital aka money to service any debt obligation. Without capital its impossible to maintain the payments for your credit obligations. This is why building an emergency fund is crucial. It is not only important to have for the uncertainties of life, but also the tool necessary to protect your credit.
There is a financial comfort that can only be obtained in building and maintaining an emergency fund. Without the tenants of frugality you will never have the discipline needed to start or keep the fund.
Benefit # 4 Control of Your Credit Utilization Ratio
Access to credit, and having credit available is a staple of modern times. Our world today revolves around people’s ability to take on and service debt. By taking on a frugal outlook you can control the most notorious forms of high interest debts which is found in credit credit cards.
Credit cards are convenient and offer and easy way to pay for purchases. But as your credit card balance rises your credit utilization will also rise. You calculate your credit utilization ratio by dividing your credit card balances by your credit limit.
Your credit utilization makes up 30% of your overall credit score. Frugality will lead you to want to control your credit utilization ratio, always striving to keep it at 10%. This is not an easy task but one that can be done by being diligent and keeping balances on all debt obligations as low as possible.
Benefit # 5 Building Credit in Your Budget
Costs are constantly being monitored as frugality is your general course of action. This provides comfort and discretionary income allowing you to build credit in your budget.
For example breathing room in your budget can allow you the confidence to apply for credit cards with lower interest rates and travel rewards. Or you may look for credit cards with great promotions and sign up bonuses. Either way you now have the ability to make credit building a priority and a general mode of operations in your monthly budget.
With every payment you’re building a history of positive activity. This not only does well for your credit report but has the added benefit of increasing your credit score.
The Finishing Touch
Frugality gives you the mindset needed to operate in the world of credit we find ourselves living in. Positive money management choices makes you efficient in credit building choices. This can only be accomplished by being frugal.