New parents face a three part financial challenge that threatens their credit rating and future ability to borrow money at affordable interest rates: increased borrowing, followed by unexpected medical expenses, followed by lost income. The affects to your credit rating and scores can be devastating and last for years.
Follow our new parent credit rating survival guide for tips on how to keep your financial bubble from bursting. Managing your credit rating requires you to first understand:
- How credit ratings work in general
- Where are the pitfalls for new parents?
- Survival Guide – What to do in preparation
How Credit Ratings Work in General
Credit ratings and scores are often a mystery to many people. They don’t always work the way you might want or expect. People expect that a clean history translates into a good score. But that is not the case, because scores are designed to predict which borrowers will have problems managing their finances during the next eighteen months.
A great deal of mathematical analysis has gone into these rating systems, and the scores reveal a story that may surprise many people – the borrowers who get into trouble don’t leave enough cushion for unexpected events. Explore four primary factors which may impact your credit rating:
Length of history impacts your score. The shorter your history, and thinner your file of transactions the lower your rating. But there is little to do other than letting time go by, and prudently opening new accounts.
Delinquent or derogatory accounts suppress your score, and are best avoided both now and in the future.
Large borrowing balances and high utilization ratios are an indication of future credit challenges. They indicate that people are spending more than they earn, and have little or no emergency reserves. Any sudden increase in spending, or drop in income could spell trouble.
Credit to income ratios bring us closer to the truth. Mortgage lenders often consider this ratio when determining the loan amount you might qualify for. Although income does not appear on your credit report, and is therefore not part of your credit risk score or rating – income continuation is crucial to your ability to repay debt.
Where are the Credit Pitfalls for New Parents?
The financial challenges of new parents provide a great example for why these credit algorithms work the way they do. Parents often accumulate debt when trying to conceive, preparing for the newborn, and providing for an infant at home. All goes well unless there are unexpected expenses, and or lost income. For new parents this combination is far too common, and can create a distressing scenario. Consider what happens to many couples:
Infertility can lead to extra borrowing. Nowadays, many couples need to borrow money just to get pregnant. Couples are waiting longer to start a family, and as we age our ability to conceive declines. Artificial reproductive techniques are often needed, but health insurance rarely covers infertility. Couples may exhaust savings, put the expense on credit cards, or refinance their home to cover the added expense.
Spending and borrowing increases after conception. There may be a need for a bigger car, or a second vehicle. Couples may decide they need an extra room for their pending newborn. This may mean moving from the apartment into a new home, buying a bigger house, or renovations. Credit card balances may grow to purchase cribs, basinets, medical supplies, baby decorations, and more.
Then unexpected medical bills crop up if mom experiences complications during her pregnancy. There may be extra expenses for doctor visits, traveling expenses, or extra child care while mom is at the doctor. Both mom and baby may need to spend unscheduled time in the hospital after delivery. There may be unexpected hospital bills for an extended confinement or a second deductible payment if a NICU stay is needed. After returning to work, there may be extra child care expenses.
Lost income is quite common with new parents. If mom experiences complications prior to delivery, she may need to leave work – sometimes months before her due date. While recovering from child birth she won’t be working either. In the U.S. paid maternity leave is very rare. Maternity leave laws providing job protections are also very short and very sparse. Mom may lose her job.
Parents stretched to make loan payments before the extra expenses combined with lost income take a huge and long lasting hit to their credit.
New Parent Survival Guide – How to Prepare
Any survival guide will tell you that preparation is important. New parents can give their credit rating the best chance of survival by preparing prior to conception, while expecting, and after their precious bundle of joy comes home.
Prior to conception
Buy the optimal maternity health insurance. The plan with the lowest premium cost may not be most affordable when you factor in your out of pocket costs for prenatal care, sonograms, and hospitalizations.
Purchase short term disability for pregnancy. If you are planning a maternity leave to recover from childbirth, you are planning a temporary disability. Protect your income to help make the loan payments while not working.
Purchase hospital indemnity insurance. Receive cash payments to fill hospital deductibles and replace income if your infant requires an extended NICU confinement.
Recycle before you buy. Most parents of older children are desperate to offload all the unused cribs, monitors, swings, walkers, clothing – you name it. Their homes are cluttered with perfectly operational equipment now collecting dust. Any reduction in expenses goes a long way to preserving financial stability.
Lower your taxes. Use your flexible spending account for moms’ predictable medical expenses. She has plenty. Use of pretax contributions cuts your costs by one third or more.
Learn your work rights. The United States has a patchwork of maternity regulations that provide job protected leave for certain employees working for certain employers. Sixteen states have supplementary regulations. Unemployment compensation can provide some income protection in limited situations. Loopholes and inconsistency abound.
Inform your employer. Let mom’s employer know about your plans and ability to work. Be honest.
After Becoming a New Parent
Pay your bills on time. If you have to make minimum payments on credit cards do so. Any delinquency stays on your credit report for seven years.
Cut your childcare costs. Use your dependent care flexible spending account to get the biggest tax savings you can.
File maternity pay claims. Both short term disability and hospital indemnity may cover your normal delivery. Five states have mandated plans that cover most workers.
Study your health plan documents. Know what it does and does not cover, because medical providers make billing mistakes. You can cut medical costs just by challenging the biller, and/or the insurance carrier.
Negotiate medical bills. Medical providers like getting paid. Out of network providers often charge outrageous and unrealistic amounts. Most will agree to lower these fees if you are willing to make some payment. You don’t want these bills getting referred to a medical collections company. The charges may appear on your credit report, which can hurt your rating for years.