Big words, we know, but this doesn’t have to be a big issue
When we think of building credit, our minds often jump to credit cards, loans, and paying bills on time. However, a little-discussed aspect of enhancing your credit health revolves around discretionary spending.
For our Finance Genie readers, especially the hardworking middle-class women looking to make every dollar count, understanding the link between discretionary spending and credit can be a game-changer!
What is Discretionary Spending?
First, let’s define our terms. Discretionary spending refers to the money spent on non-essential items or services, those things you want rather than need. This could range from your morning latte to that stunning dress you’ve had your eye on.
How Does It Impact Your Credit?
- Controlled Credit Card Use: Using a credit card for discretionary purchases and paying it off in full every month can reflect positively on your credit report. Regular, responsible credit card use shows lenders you’re trustworthy.
- Avoiding High Credit Utilization: Discretionary spending, if uncontrolled, can cause you to max out your credit cards, which can hurt your credit score. By keeping your balance low, preferably under 30% of your credit limit, you can boost your credit score.
- Establishing a Credit History: If you’re new to credit or have a thin file, making small discretionary purchases and paying them off promptly can help establish a credit history. Remember, the length of your credit history contributes to your score, so starting early and being consistent matters.
Smart Discretionary Spending Tips
- Budget for It: Always set aside a portion of your income for discretionary expenses. This not only ensures you’re living within your means but also prevents you from accumulating unnecessary debt.
- Use Rewards Cards: Consider credit cards that offer cash back or rewards for your type of discretionary spending. Those little rewards can add up, giving you an added bonus for spending you’d do anyway.
- Stay Vigilant: Regularly monitor your credit card statements for errors or fraudulent activities. This will help you catch any potential threats to your credit early.
In Conclusion
While discretionary spending might seem unrelated to credit-building at first glance, when done right, it can be a strategic tool in your financial toolkit. Using your credit card for discretionary expenses and paying off the balance in full each month can be a powerful way to build credit over time.
Always remember, the key is responsibility. Don’t view your credit card as a means to spend beyond your means. Instead, consider it a tool, one of many, to pave a clear financial path to the future.
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