What Moms Need to Know About Debt

If you are a mom with student loans, credit cards or maybe medical debt, you probably know its effect on your blood pressure. Financial stress is one of the most frequent causes of restless nights.

However, you also create excess anxiety when you remain in fear of the unknown. That’s why financial literacy is vital — if you don’t understand money, how can you improve your economic situation? Here’s what moms need to know about debt if they hope to get and stay in the black.

1. It Can Affect Your Child’s Inheritance

As a mom, you probably envision passing on your worldly possessions to your children after you die. However, if you don’t have a will, the state decides how to distribute your assets. The authorities won’t donate the leftovers to a foster charity for homeless cats, but they will take whatever they need to cover your outstanding debts.

That means that, even if you die with $100,000 in the bank but have $90,000 in outstanding student loans, your children will only inherit $10,000. That isn’t enough to pay for many funerals these days. Is there any workaround?

Yes. If you secure a life insurance policy, you can name your estate as the beneficiary and use the proceeds to pay off your debts. This savvy financial planning move can pay off your family home so that your children have a place to live until they turn 18. Naming a minor as a sole beneficiary isn’t the best idea — the state will hold their money until they come of age.

2. It Can Make Home-Buying Harder

What happens, though, if you rent? If you hope to have a home to pass on to your children someday, carrying too much debt can prevent you from purchasing one. Lenders look at several factors when determining whether you qualify to buy, one of which is your debt-to-income ratio.

Lenders calculate your debt-to-income ratio by dividing your monthly expenses by your pre-tax pay. Most lenders today prefer you to stay below 36% to ensure you can repay your obligation. However, this figure sometimes omits costs like food, health insurance and gas, so the lower you can get that percentage, the better.

3. It Affects Your Car Payments

Unless you live in a metro area with an outstanding public transportation system, you need a car. This rule goes double for moms who don’t want to wait at bus stops with wayward toddlers.

When you buy a vehicle, your dealer makes their money through something called a finance reserve. This figure consists of the difference between the interest rate their preferred lender offers them and the rate they offer you.

While many jurisdictions cap this percentage at 2.5%, some dealers can and do charge more. They’re more likely to do so if you seem like a risky proposition, and the more debt you carry, the more you pay over the life of your loan.

4. It Can Prevent You From Getting an Education

Do you have outstanding student loans? If you think you might want to attend graduate school someday, you need to keep them from defaulting. If you do, you won’t be able to obtain more education financing until you catch up with your late payments.

However, don’t despair if you have already fallen behind and the process seems daunting. While consolidation won’t remove the default from your credit history, it can lower your monthly payments. It limits you to income-based repayment, but making three voluntary full monthly payments will rehabilitate your loan and restore your eligibility for deferment or forbearance.

COVID-19 relief packages hit the pause button on your repayment obligations. However, you can use this time to pay as much as possible and reduce your principal and interest.

5. It Can Costs You Hundreds Each Month

Do you carry multiple credit card balances? While these lending instruments can serve a necessary purpose in covering emergencies, you shouldn’t max them out on designer handbags and shoes.

If you need a reality check, use a credit card interest calculator to see how much you will end up paying over the years. For example, a $5,000 loan will cost you almost twice as much to repay if you make the minimum payment each month.

6. It’s Necessary for Building Credit

With all this negative news about debt, you might think it’s best not to carry any at all. However, you need to show creditors that you can manage your money if you ever hope to secure a mortgage or get a loan for any other purpose.

Try to make the majority of your debt what lenders consider “good” debt. This category includes things like student loans, mortgages and business loans if you own your shop.

“Bad” debt is what you want to minimize. It involves consumable goods like clothing and cars. While you might need to buy a new ride occasionally, you should reduce this type of spending.