6 Things New Parents Do That Hurt Their CreditPublished on June 17, 2019 by CreditFresh
When you have a new baby, you may expect a few things in your life to suffer, like your sleep schedule or your time for self-care. However, you may be surprised to hear that your credit can also take a bit of a hit without you even realizing it.
It’s normal for new parents (especially first-time parents) to live in the moment. You just want to get through this car ride or this trip to the grocery store without forgetting anything, or maybe you just want to get the baby down to sleep just for this night so you can get some much-needed shut-eye of your own. It’s difficult to find time to worry about anything other than your newborn.
Without the time to stop and look forward, as a new parent, you may develop some bad financial habits that are hurting your credit without even realizing it. We’d like to help by examining the 6 most common things that new parents do to damage their credit.
1. Impulse Spending and Emotional Spending
When you’re constantly tired from all the responsibilities associated with having a new baby, you may be led to make fatigue-driven financial decisions that potentially throw your budget out the window.
All of these decisions are seemingly innocent at the time, however you may not realize they’re adding up. You’re pressed for time, so you buy items at the more expensive grocery store because it’s close by. You might order in more often because you’re too tired to cook. Or, you simply want to get out of the house to be around other adults and take a trip to the mall or grocery store. This leads to spending money on things you may not necessarily need.
It would be normal for new parents will often engage in emotional spending, where they want everything to be perfect for their baby. They may only buy the “very best” products which may not be what the baby actually needs. Unfortunately, these are often the most expensive products.
Overspending is one of the fastest ways to hurt your credit, and new parents need to be very conscious of their budget, as difficult as it may be.
2. Not Having a Financial Safety Net or Emergency Fund in Place
Even the most financially responsible parents can be blindsided by surprise expenses. Life is full of these surprises and adding a child to your life only increases the number of potential expenses that can come from out of nowhere.
Unexpected expenses may include:
- Medical bills
- Veterinary bills
- Home or automotive repairs
You are likely spending more money than you did before you had a child, and now your income may be reduced because only one parent is working. This places more importance on having a safety net or emergency fund in place to deal with any unexpected expenses.
Could you find an extra $400 for an unexpected expense if an emergency were to happen tomorrow? $40% of surveyed Americans said finding that money would be a real problem. When faced with an unexpected expense and not enough money in the emergency fund, an alternative is to get a line of credit.
You may start your request by simply answering a few questions online. It only takes a few minutes. You only need to confirm your credit limit, securely verify your details, and review and sign your agreement. The process is fast and secure, and if approved and you request a draw, funds will be deposited in your bank account as soon as the next business day.
How Does a Line of Credit Work?
A personal line of credit may also be referred to as revolving credit. This means you’re free to borrow up to your credit limit on an ongoing basis so long as you have credit available.
With revolving credit, you have a credit limit (let’s say, $2,000) that you have access to. However, you are under no obligation to use the full $2,000. If you only need $800 for now, that’s all you have to use. You will only be charged based on what you use.
3. Too Many Big Box Retailer Credit Cards
What’s in your wallet? You may be drawn to big box stores to buy bulk diapers and paper towels. Once there, you may be lured by big box credit card deals that offer you cash back or 10-15% off when you put in-store purchases on your card. Now all of a sudden, you have a wallet full of store-specific credit cards you don’t really need.
These deals and discounts can be tempting, but you need to factor in the damage that the application process for each of these cards can do to your credit score. According to credit.com, applying for a credit card may reduce your FICO credit score by as much as 5-10 points. This means that if you apply for three additional credit cards, you may see a reduction by as much as 15 points. Retail offers are great, but it helps to be strategic when applying for credit cards.
Besides the initial knock these cards can put against your credit score, they can also hurt your credit in two other ways.
Credit Utilization Ratio
People may say, “The card only has a $300 limit. How much damage could I really do?” However, that low credit limit, i.e. your credit utilization ratio, could negatively impact your credit score. This number compares your credit card balance to your credit limit. For example, if you have borrowed $150 on a store credit card with a $300 limit, you’re already at a 50% credit utilization ratio.
What is a good credit card utilization ratio? Some experts may disagree, but generally, a good credit utilization ratio is around 30%.
If you have these cards, make sure you’re not using them to inadvertently go outside your budget. Also, make sure you’re paying down the balance as quickly as possible.
No Activity At All on the Card
On the other side of the coin, getting one of these cards and never using it will not help you build your credit. To be clear, although carrying a zero balance with no activity may not hurt your credit, it won’t help you build your credit. If you’re looking to build your credit, you’re going to need some activity.
Putting purchases on these credit cards and paying off the balances in full or at least keeping the balance as low as possible, in a timely fashion, may help your credit score by showing a healthy payment history to credit agencies.
4. Having Too Many Loans or Credit Cards in One Partner’s Name
Some couples will have all of the household loans and credit cards under one party’s name because that person is the primary income earner of the household, while the other may be a stay-at-home parent.
However, this can be a mistake. This impacts the stay-at-home parent’s chance to build their own credit rating. Credit mix determines 10% of a FICO Score, so it may be helpful for the stay-at-home parent to have credit cards or lines of credit open and active under their name to help build their credit.
Even a small amount of activity may help them. It could be beneficial for the stay-at-home parent to put their gas purchases or a monthly subscription cost on a line of credit or a credit card, and then pay off the balance on a timely basis.
You don’t necessarily need your own income to qualify for a credit card. In 2013, the Consumer Financial Protection Bureau changed a rule to allow card issuers to consider household income for stay-at-home spouses, opening the door for stay-at-home parents to be able to get cards based on income shared with a working spouse or partner.
5. Too Much Impulse Spending on Credit Cards
We have already explored the damage that carrying too high of a balance or a high credit utilization ratio can do to a credit score. So, consider how a household is using credit cards.
Are you using your credit cards strategically and quickly paying down the balance as we outlined above? Or are you using the available credit to cover a cash shortfall, with no plan on how to pay it back?
Having a credit card or a line of credit as a financial safety net can be helpful. However, if you have to rely on unsecured loans every single month, you may be living outside of your means and you should consider revisiting your budget.
Couples that are seeing a month-to-month cash shortfall may want to revisit their spending habits to nip the issue in the bud right away, such as using credit cards to cover gaps in cashflow, extending the problem over several months, or several thousands of dollars.
Revisiting a budget can help people find unnecessary costs or subscriptions that they can stand to lose or cut back on. Canceling a few $15 monthly subscriptions or cutting the premium cable package could help a couple free up a portion of their budget every month. This extra hundred dollars a month can go a long way to preventing cash shortfalls.
6. Not Talking About Money
An open and honest line of communication about money between spouses or partners is crucial to each individuals’ credit and the couple’s overall financial health, yet too many couples don’t talk about money.
A recent survey found that 90 percent of respondents who identify their relationships as happy discuss money at least once a month, while only 68 percent of unhappy couples discuss money this often.
Meanwhile, more than 75% of US workers are living paycheck to paycheck. A higher income doesn’t necessarily mean you’re doing much better, with 1 in 10 workers earning $100,000+ living the same way.
If a couple is living paycheck to paycheck, they may want to discuss money more often than once a month. This may help them identify harmful spending patterns and opportunities to cut back. This can also help to ensure that either partner isn’t carrying too much debt without a plan to pay it back. It’s also important for partners to work together to ensure that they’re not paying bills late.
Day-to-day life for new parents can be stressful and it may be tempting to put off what may be perceived as a stressful conversation about money. However, this communication is imperative to a couple’s financial well-being, and may actually help them reduce their shared stress.
We hope you’ve found this blog helpful and can use some of the tips to help avoid bad credit decisions as a new parent.
The key points we would like you to remember are:
- Be mindful of your emotional spending
- Is it good to have multiple credit cards? Only if you keep a low credit utilization ratio and if you pay off your balances (or keep a low balance) on a timely basis
- A personal line of credit may be the financial safety net you need for life’s unexpected emergencies
- Try not to put all lines of credit and credit cards under one partner’s name
- Track your impulse spending carefully, especially when you use your credit card
- Talk openly and honestly about money as often as possible with your partner