How to Improve Credit When Living Paycheck to Paycheck

A man using a calculator while he holds a document.

If you find yourself perpetually short on cash before payday, you're hardly alone. According to a recent CareerBuilder report, 78 percent of U.S. workers are living paycheck to paycheck.

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?

300 credit score301 credit score302 credit score303 credit score304 credit score305 credit score306 credit score307 credit score308 credit score309 credit score310 credit score311 credit score312 credit score313 credit score314 credit score315 credit score316 credit score317 credit score318 credit score319 credit score320 credit score321 credit score322 credit score323 credit score324 credit score325 credit score326 credit score327 credit score328 credit score329 credit score330 credit score331 credit score332 credit score333 credit score334 credit score335 credit score336 credit score337 credit score338 credit score339 credit score340 credit score341 credit score342 credit score343 credit score344 credit score345 credit score346 credit score347 credit score348 credit score349 credit score350 credit score351 credit score352 credit score353 credit score354 credit score355 credit score356 credit score357 credit score358 credit score359 credit score360 credit score361 credit score362 credit score363 credit score364 credit score365 credit score366 credit score367 credit score368 credit score369 credit score370 credit score371 credit score372 credit score373 credit score374 credit score375 credit score376 credit score377 credit score378 credit score379 credit score380 credit score381 credit score382 credit score383 credit score384 credit score385 credit score386 credit score387 credit score388 credit score389 credit score390 credit score391 credit score392 credit score393 credit score394 credit score395 credit score396 credit score397 credit score398 credit score399 credit score400 credit score401 credit score402 credit score403 credit score404 credit score405 credit score406 credit score407 credit score408 credit score409 credit score410 credit score411 credit score412 credit score413 credit score414 credit score415 credit score416 credit score417 credit score418 credit score419 credit score420 credit score421 credit score422 credit score423 credit score424 credit score425 credit score426 credit score427 credit score428 credit score429 credit score430 credit score431 credit score432 credit score433 credit score434 credit score435 credit score436 credit score437 credit score438 credit score439 credit score440 credit score441 credit score442 credit score443 credit score444 credit score445 credit score446 credit score447 credit score448 credit score449 credit score450 credit score451 credit score452 credit score453 credit score454 credit score455 credit score456 credit score457 credit score458 credit score459 credit score460 credit score461 credit score462 credit score463 credit score464 credit score465 credit score466 credit score467 credit score468 credit score469 credit score470 credit score471 credit score472 credit score473 credit score474 credit score475 credit score476 credit score477 credit score478 credit score479 credit score480 credit score481 credit score482 credit score483 credit score484 credit score485 credit score486 credit score487 credit score488 credit score489 credit score490 credit score491 credit score492 credit score493 credit score494 credit score495 credit score496 credit score497 credit score498 credit score499 credit score500 credit score501 credit score502 credit score503 credit score504 credit score505 credit score506 credit score507 credit score508 credit score509 credit score510 credit score511 credit score512 credit score513 credit score514 credit score515 credit score516 credit score517 credit score518 credit score519 credit score520 credit score521 credit score522 credit score523 credit score524 credit score525 credit score526 credit score527 credit score528 credit score529 credit score530 credit score531 credit score532 credit score533 credit score534 credit score535 credit score536 credit score537 credit score538 credit score539 credit score540 credit score541 credit score542 credit score543 credit score544 credit score545 credit score546 credit score547 credit score548 credit score549 credit score550 credit score551 credit score552 credit score553 credit score554 credit score555 credit score556 credit score557 credit score558 credit score559 credit score560 credit score561 credit score562 credit score563 credit score564 credit score565 credit score566 credit score567 credit score568 credit score569 credit score570 credit score571 credit score572 credit score573 credit score574 credit score575 credit score576 credit score577 credit score578 credit score579 credit score