Thrifty Thinking: New Parents with Bad Credit: What to Do?

The birth of a child is a joyous event for parents, and many see it as a sign of new responsibilities in their lives. New parents will also discover that children are extraordinarily expensive. The cost of raising a child from birth to age 18 is $241,080, according to an August 2013 U.S. Department of Agriculture (USDA) report. This amount includes costs for providing a roof over the child's head, food, transportation expenses, and other areas such as healthcare, education, and the initial childcare inherent in raising a baby and toddler. 

If you are new parents with bad credit, the task of raising a child becomes much more difficult to handle. Your ability to make essential purchases -- a house, a car, etc. -- will be impaired by your credit rating. Understanding what bad credit is and what can be done to improve it is important in order for you to meet your obligations as a parent and to get back on the road to financial stability.

The Problem with Bad Credit  

In the United States, a credit scale of 300-850 is used to determine your credit risk. The higher the rating on this scale, the less risky you are to a lender. This scale, developed in the 1950s by MyFICO, is what the three major credit agencies (Equifax, Experian, TransUnion) provide to lenders. A score lower than 625 usually indicates a bad credit risk; the average score in the United States is 661.  

There are some lenders who will make loans to people with bad credit. The interest rate that you can expect from these "second chance" loans will vary depending on the lender's requirements and the amount being lent. The current prime lending rate that banks use to determine its loan rates for customers is 3.25 percent as of October 2013, according to the Federal Open Market Committee.

Programs to Help Build Credit 

Second chance programs can help, but they can also be a trap: interest rates can be anywhere from five to 15 points higher than the prime rate, adding $50 to $150 per every $1,000 borrowed. Finding programs that can help negotiate old debts and put you on a payment plan would be more helpful in many cases.

Managing Your Expenses Wisely  

Having good credit is not an accident. What separates those with bad credit from those with good to excellent credit comes down to discipline and will power. It is easy to become tempted by the lure of consumerism and the sense that every new, latest, and greatest item is something that you should buy. If you can resist the urge to break out the credit card every time a newer version of your mobile phone comes out, or keep yourself from buying another high-definition 60-inch television, you can put yourself in a more favorable position later on by saving your money and lowering your debts.

You should make a list of the things you want to buy and the things that you need to buy as a new parent. Another helpful tip to better manage your finances effectively is to periodically review your credit report -- you should do so at least once a year -- to see what items are being reported by reporting agencies. This will give you the opportunity to challenge the validity of nefarious-looking items on the report. Maintaining vigilance and controlling your spending while you pay old debts can help as you improve your credit and provide for your family.

This article was provided by CJ Gordon, recent college graduate working on getting his credit back on track after college. If you're new parents –or really anyone for that matter—looking to improve their credit, visit Best Credit Offers.