Overspending and your FICO Score

According to the Cambridge Dictionary, the definition of “overspend” is “money that is spent on something above the amount that should have been spent.” That makes perfect sense, right? And it makes even more sense that in order not to overspend, just don’t spend “above that amount that should have been spent”.

Yet, many of us do it all the time. Why? The top reasons are listed below, along with how overspending can affect your credit. The trick is learning how to stop overspending, so we’re providing a few tips that might help you with that.

Why People Overspend

  1. Keeping up with the Joneses. People can feel the need to have the same items or do the same things as their friends and neighbors. If they can’t have or do these things, they worry about being less “important”. Unfortunately, keeping up with the Joneses could also cause a problem keeping up with your bills.
  2. Credit Cards. “Paying with plastic” is just too easy. In fact, you’ll most likely spend more money with plastic than if you were shopping with cash. The idea of “paying for it later” can become addictive and create a cycle of putting things on credit before you’ve had a chance to pay off your current balances.
  3. Ignoring Your Budget. Budget? What’s a budget? When you determine your monthly income and expenditures and keep your spending down so expenditures are less than income, you’ve created a budget. Some of us have a budget in our minds while others have written it on paper. Neither will matter if you don’t follow it or put its spending limitations into practice.
  4. Impulse Buying.  The majority of shoppers make buying decisions in store aisles or while shopping online. For instance, if you’re hungry while grocery shopping, you’ll buy more food. Or, if you’re online and place an item in your cart only to see additional purchase options labeled “other people who bought this item also bought this”, one click on the ADD TO CART button is all it takes to overspend.

How Overspending Affects Your Credit

Payment History, how well (or not) you repay your debt, makes up 35% of your FICO® Score. When you overspend and are unable to pay your credit card balances or monthly bills on time, your Payment History is negatively affected. However, when you stay within your budget and are able to pay all your bills on time, your Payment History should reflect that in positive ways.

Amounts Owed, the percentage of your available credit being used comprises 30% of FICO® Score. So, for instance, if your credit card limit is $5,000 and instead of spending your budgeted $250 at your favorite retail store you spent $4,000, your credit utilization is 80%. That high percentage leads to a lower credit score.

These two credit score factors alone make up 65% of your FICO® Score. So you can imagine what happens if you overspend one month with the full intention of paying it off the next month, only to be hit with unexpected expenses. You then have to pay for those unexpected costs, new monthly costs, interest charges and possible penalties. In time, expenses outweigh income and the cycle of late or non-payment takes hold – negatively affecting 65% of your credit score.

Ways to Stop Overspending

  1. Following a Budget. The number one way to stop overspending is to create a budget and stick to it. As stated above, you can have a great budget, in your mind or on paper, but if you don’t follow it you’ll continue to overspend. Before going out to shop or searching online for the latest gadget you “need” to have, keep the maximum amount you can spend in full view. Stick a note on your computer screen or put an alert on your tasks or calendar. Do whatever it takes to make sure you don’t spend any amount over that number.
  2. Use Paper. It’s easier than ever to pull that credit card out of your wallet and make purchases to “pay off later”. Sure, it feels good at the moment, but what about when the bill arrives? Before going out to shop, put the amount of cash you feel you can afford to spend in your wallet or purse… and no more. Cash is finite, plastic is not. Stick with the one that ensures you put a limit on your spending.
  3. Spend Less. Spend More. Wait, what? Well, if you learn how to spend less on monthly expenses, you’ll be able to spend more on the things you really want to purchase. Think about it… if you lower items like your cable, cell phone and grocery bills, you can use those savings to make purchases without having to go over your monthly budget!
  4. Sleep On It. Changing our mind is human nature and when it comes to impulse purchases, that’s a good thing. The concept of “I want it now” oftentimes changes after we’ve had a chance to think about and even sleep on it. Need that new gadget… blouse… car… right now? Give yourself some time before making the final decision. You might not need it as much as you thought you did.

See how others have managed their overspending at the myFICO forum. You’ll probably get some good ideas for yourself and for those who need some overspending intervention.

 

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Rob is a writer… of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one’s journey toward financial well-being. His goal is simple: The more people he can help, the better.

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