Budgeting is the core of all good money management, playing an integral role in your financial stability. Following a good budget can ensure that you live within your means, have enough money set aside for emergency expenses and important life goals, and avoid the pitfalls of overwhelming debt. In addition to all these important benefits, sound financial management can help you build a strong credit history, opening doors to future successes like getting approved for a home loan.
The new year is a time when many individuals find themselves facing larger-than-usual bills as Christmas purchases hit January credit card statements. But it’s also a time for new beginnings—like creating a budget to take control of your spending, pay off debts, and build good credit to help you achieve important financial milestones.
In this post, we’ll discuss the relationship between budgeting and credit, sharing budgeting methods that can help you improve your credit standing. We’ll also take a look at budgeting and credit advice specific to residents of Illinois to help you better understand and navigate local economic conditions and find the right help when you need it.
Understanding Your Credit History
Your credit history is documentation of your recent (up to seven years in the past) use of credit, including credit cards, loans, and other ongoing payments (like utilities or rent). Many companies automatically report on time or late payments, account balances and usage, reports to collections, and defaults (when you stop making payments) to one of three major credit reporting agencies. To make it easier to understand the combined meaning of all these items, credit reporting agencies can compute this history into a number called a credit score.
Your credit history can be an important signifier of your responsibility—both financial and otherwise—to many. When applying for a loan or credit card, the lender or company will first review your credit history to determine what options, including interest rates and loan amounts/credit limits, are available to you. Landlords and rental agencies will review your credit history when considering you for an apartment. Utility companies may charge extra fees for individuals with poor credit. Even some employers in Illinois, including financial institutions and state government agencies, may look at your credit history to get a sense of your dependability.
How Poor Budgeting Can Impact Your Credit
Two of the largest components of your credit score are payment history and amounts owed—accounting for about two-thirds of your total score. When you have late payments of more than thirty days, have accumulated a large portion of debt compared to your income, or have used up a significant amount of the credit limit available to you on one or more cards, this can negatively impact your credit.
The connection between maintaining a budget and having good credit is clear. When you know how much you can afford to spend and create strategies to allot sufficient funds for paying off debts each month, you will be rewarded with a better score. When you overspend, are unable to pay your bills in full and on time, or accumulate too much debt, the consequence is a lower score.
Types of Budgets
For many, using a budgeting system is essential in maintaining control over finances. If you are looking to build or rebuild your credit history, creating a budget can provide you the framework for how to get there, helping you know your spending limits, ensure there’s enough money each month to pay your bills and find room for savings and investments, paying off debts, and other long-term financial goals. Because of this, budgets are even more essential when you are living paycheck to paycheck. Let’s look at a few popular budgeting methods to see how they can become a bridge to stronger credit.
50/30/20 Rule
If your credit woes are the result of overspending on things you may not need or never having enough in your emergency fund to cover unexpected expenses, this method may be for you. In the 50/30/20 system, you allocate 50% of your income to cover essential needs, dedicate 30% to fulfill discretionary wants, and reserve 20% for savings and long-term goals like paying off debts. Whether utilizing budgeting apps or manually tracking expenses through receipts and statements, this method promotes financial discipline.
Additionally, adjusting the percentages based on your unique circumstances allows for flexibility, enabling individuals to tailor the budget to their specific needs and financial goals. Need to pay off debts faster? Does 50% not cover your everyday expenses? Reduce discretionary spending to accommodate your specific financial needs. By adhering to this budgeting strategy, individuals can not only manage their finances effectively but also cultivate positive financial habits that contribute to a healthier credit profile over time.
Zero-Based Budgeting Method
An excellent tool for debt elimination, zero-based budgeting is a financial management approach where every dollar of income is assigned a specific purpose, ensuring that the total budget equals zero. This system, which requires individuals to allocate funds deliberately and leaves no room for unmonitored spending, allows you to prioritize debt repayment while ensuring that you closely watch other areas of spending. If this seems like a lot of work, don’t worry—there are apps for it!
Envelope System
In this time-tested system, you assign a fixed dollar amount for both essential expenses and discretionary wants, placing the allocated sum—in cash—into designated envelopes. When an envelope is empty, you’ve reached your spending limit for the month. This approach sets a firm ceiling for spending, helping to build a routine of financial discipline.
The downside to a cash-based system is that it can be exceptionally difficult to use in today’s increasingly cashless world. However, you can adapt this technique to modern times by utilizing popular budgeting apps (see link above). Alternatively, you can limit your envelope to one category—discretionary spending—to reduce spending money on things like takeout, eating out, and shopping. The upshot of using this system can be two-fold. It can reduce your usage of credit cards (a major benefit if you find the ease of using cards contributes to overspending!). By adhering to this method, you can train yourself to exercise better control over your spending habits, reducing the risk of accumulating unnecessary debt.
Pay Yourself First Method
The “Pay Yourself First” budgeting method involves prioritizing savings by allocating a predetermined portion of your income to savings goals before addressing other expenses. By consistently setting aside money for savings, you can create a financial buffer that can be used for emergencies, reducing your reliance on high-interest credit for unforeseen expenses.
Already struggling with debt? Put a spin on this system and prioritize your debt repayments instead. Just be sure that you also keep up with other financial responsibilities like rent or mortgage payments.
Additional Factors to Consider
If you are working to create a budget that allows you to pay off debt and improve your credit rating, the following practices can help you meet your goals:
- Refrain from taking on new debt—the lower your debt-to-income ratio, the higher your credit score will be.
- Explore the option of consolidating high-interest debts through a lower-interest loan. This can not only reduce interest, but it can bring many past due accounts current, creating immediate improvement.
- Reach out to your creditors to attempt to negotiate a lower interest rate, establish a structured payment plan, or even reduce your overall balance.
- Don’t be afraid to ask for help. Seek guidance from a financial expert or certified credit counselor to determine the most effective strategy tailored to your specific situation.
Improving Your Financial Wellbeing in Illinois
Many individuals in Illinois have fairly healthy credit ratings, with a state average of 704, well within the “good” range. However, higher scores can improve the chances of loan approvals as well as give you access to the best rates available. While much of the advice we’ve discussed above can be applicable across the US, there are some circumstances unique to Illinois that can make it easier (or harder) to improve your financial standing. Let’s explore a few.
Budgeting Resources in Illinois
In Illinois, there are a plethora of resources available to individuals who are looking to learn or improve financial management skills. Here are a few top places to check out:
- The Illinois State Treasurer offers a robust Financial Wellness Hub with courses on a range of subjects, including saving for an emergency, managing debt, buying a home, and more.
- Through their Next Step™ Financial Opportunity Center®, Mid Central Community Action can provide one-on-one financial education and coaching, including assistance with debt reduction and credit rebuilding, to families looking to get back on their feet.
- At Flanagan State Bank, we also offer a variety of financial literacy resources geared toward children and college students, as well as guides for Managing Your Checking Account and Preventing and Managing Overdraft Fees. And we’re always happy to talk with you in person about any questions you have about debt, credit history, or budgeting!
Local Cost of Living
The cost of living in Illinois varies drastically based on your location. Fortunately, for local customers of Flanagan State Bank, Central Illinois offers some of the most affordable places to live in the country, helping you keep your necessary expenses lower. According to MIT’s Living Wage Calculator, here is the annual income needed for a family of four in various local areas:
If your income lies above these parameters, you probably can find room in your budget to reduce debt and improve your credit score with some adjustments to spending. However, if your annual income falls shy of these figures, you may be wondering about the possibility of increasing your income with a better-paying job—one of the best ways to achieve financial stability.
Illinois Job Market
While in many areas of Illinois, it can be harder to advance career-wise due to a higher than national unemployment rate and tighter job markets, Central Illinois counties, including Livingston, McClean, and Woodford, report healthy unemployment rates. In fact, as of November 2023, these rates of 3.3% to 3.4% fall well below the national average, according to a recent report by the Illinois Department of Employment Security.
It’s also important to note that an additional benefit of looking for a job in Illinois is that most employers (with the exception of the ones listed earlier) cannot use your credit score as part of your application process. This means that your current or past debt troubles can’t get in the way of you landing the job you deserve.
Take Control of Your Finances with Tools from Flanagan State Bank
Are you ready to take control of your financial journey? Explore our suite of products and services designed to empower you on the path to financial success. Whether you’re looking to build credit, optimize your budget, or achieve your long-term financial goals, we’re here to guide you every step of the way.
Reach out to our dedicated team in Flanagan, El Paso, Benson, Bloomington, Le Roy, Gridley, or Pontiac today to learn more about the financial tools we offer and get personalized help with your budgeting and credit needs.
