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Budgeting

Is Your Budget on Track?

Matthew and Clarissa Willis are the parents of an 18-month-old son, Cesar Gabriel, and use their credit cards to buy everything. But the Willises, both 30, are not your average family. Although many Americans are heavily in debt -- the average credit-card holder who carries a balance owes $12,300, reports credit bureau Experian -- Matthew and Clarissa pay their bill in full every month.

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The Willises, who live in Rockville, Md., check their statements online and pay bills promptly to avoid late fees and interest charges, which helps them keep a high credit score. "It's amazing how much money you can save if you have a good credit score," says Matthew, who spent several years rebuilding his score after it took a hit when a disputed cable-TV bill went to collection. Once down in the 500s, his score has bounced back smartly and is now near the national median of 723.

A good credit rating helps a lot when Matthew and Clarissa borrow money to support their hobby and their biggest financial commitment: buying and renovating houses to rent or sell. That sideline makes the most of Matthew's day job as a contractor and Clarissa's work as a real estate agent.

To stay out of credit-card debt, the Willises keep about $5,000 on hand for unexpected bills. Try to hold three to six months of living expenses in reserve. But you can keep that figure on the low side if you have other ways to raise cash quickly, such as the low-interest home-equity line of credit that the Willises would use in an emergency -- but only in an emergency. If they can't pay off a balance one month, they have a card with a 0% interest rate -- another good resource to keep in reserve.

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Follow these six tips to tame your spending and keep your budget in shape:

  • Pay bills online. You're less likely to miss deadlines that could cost you late fees and hurt your credit score.

  • Maintain an emergency fund. Keep enough in a bank account or money-market fund to pay three to six months of expenses. Search for high-interest accounts in our yields table on our Credit page.

  • Switch to low-rate credit cards (go to www.cardweb.com). If you can't erase your debt by the time the lowest rate expires, transfer balances to another bank.

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  • Order a credit report at www.annualcreditreport.com and fix any errors. It's free. Before you buy a house, or if you're just curious, check your credit score at MyFico.com.

  • Boost your credit score by avoiding late payments, reducing your outstanding debt as a percentage of your available credit, and clearing up any disputed bills.

  • Track your cash flow for a month. A flexible blueprint allots about 30% of take-home pay for housing, 10% for utilities, 15% for food, 10% for transportation, 5% for clothing, 10% for debt repayment, 5% for entertainment and 5% for insurance and miscellaneous expenses. That leaves 10% for savings or special purchases.