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 6 common things that new parents may do to damage their credit.
1. Impulse Spending on Credit Cards
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 when you use your credit card to make impulse purchases, 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 and take a trip to the mall or grocery store. This leads to spending money on things you may not necessarily need.
Sometimes, it’s very natural for new parents to engage in emotional spending, when they want everything to be perfect for their baby. Unfortunately, this can often result in unnecessary expenses. This may lead to overspending on your credit card which affects your credit utilization ratio and is an easy way to hurt your credit.
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 drawn $150 on a credit card with a $300 limit, you’re already at a 50% credit utilization ratio.
What is a good credit card utilization ratio? Generally, a good credit utilization ratio is around 30% or lower.
If you have credit 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.
Now that we have explored what credit utilization ratio is, consider how your 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 as a financial safety net can be helpful. However, if you have to rely on credit 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.
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 history. If that’s your aim, 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 impact your credit score by showing a healthy payment history to credit agencies.
Looking to impact your credit history without a credit card? Click here to learn more!
2. Too Many Big Box Retailer Credit Cards
This leads us to our next point – big box retailer credit cards!
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 that 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. Applying for a credit card may reduce your FICO credit score by around 5 points[1]. While retail offers are great, it helps to be strategic when applying for credit cards.
3. Not Having an 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 an 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? This might be easier said than done for a lot of parents. If you’re faced with an unexpected expense and don’t have enough money in your emergency fund, a potential alternative would be to apply for a line of credit.
How Does a Line of Credit Work?
A personal line of credit is a type of 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 draw the full $2,000. If you only need $800 for now, that’s all you have to draw. You will only be charged based on what you draw.
If you choose to apply for a line of credit, make sure to do your research first and see which option suits your financial situation the best. You would not want to apply for a loan you cannot afford. With online lines of credit, the application process is fast, and in some cases, the funds may even be deposited in your bank account as soon as the same business day.
4. 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.
If a couple is living paycheck to paycheck, they may want to discuss money on a regular basis. 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.
Key Takeaways
We hope you’ve found this blog post 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
- 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
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
[1] https://www.creditcards.com/credit-management/10-things-not-to-do-before-applying-for-credit-card-1270/
