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Money Talk with Liz Weston: Babies, Building Credit, and Bankruptcy's Effect on Your Credit Score

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Liz Weston discusses preparing financially for a new baby, building credit in tight times and how bankruptcy affects your credit scores.
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Dear Liz: My wife and I are planning to have a child in the next couple of years, and I realize that I have no idea how to go about preparing for that financially. How much cash should new parents try to have available? What else should we be considering?

Answer: Congratulations in advance on your entry into the great adventure of parenthood. The most important thing to know is that you can't predict what's ahead, financially or otherwise.

The U.S. Agriculture Department estimates that it will cost middle-income parents nearly $300,000 to raise a child to age 18. But your costs could be a lot less if you're particularly frugal, or a lot more, particularly if you have a high income, plan to pay for private school or have a child with special needs.

You can get some idea of what to expect by using the Agriculture Department's new calculator at www.cnpp.usda.gov/calculatorintro.htm.

Your food, clothing and healthcare bills typically rise $3,000 or more annually with each child. You also may opt for a bigger home or car, which can add to the bill. Child care and education are other considerable expenses.

Then there are the set-up costs. The authors of "Baby Bargains," one of my favorite books about preparing for a child, say you easily can spend more than $6,000 just on equipment such as strollers, car seats, maternity clothes and nursery care. If you're smart, however, you'll try to spend a lot less, buying or borrowing used furniture and selecting well-reviewed, midrange brands of strollers and car seats rather than status brands.

You'd be smart to start trimming other expenses now and saving the difference, so that you have a fund to pay these start-up costs and so that the added expenses of a child don't push you into debt.

If one of you is planning to stay home with the baby for an extended time, consider starting to live on one income now and banking the other.

Dear Liz: In March 2008, I applied for a secured credit card with a limit of $500 and started the path to build my credit history. I was told on the phone that after 18 months, the status of my card would be upgraded to a regular, nonsecured card. Now the issuer is telling me, "We are not upgrading secured cards after a change in policy." What recourse do I have, bearing in mind that all my payments have been on time and in full?

Answer: Credit card issuers have become much more conservative in recent months. But that doesn't mean you're out of luck. Another issuer may well welcome your business.

Check your credit scores at www.myfico.com to see where you stand. If your scores are below 680 or so, you may want to consider applying for another secured card or a small personal loan to continue building your credit. If your scores are higher, though, you may qualify for a regular card. Sites such as CardRatings.com and CreditCards.com can help you look for offers.

Dear Liz: It looks as if I will have to file for personal bankruptcy because of a business failure. (I guaranteed the debts personally, and there are two I know I can never repay.)

I could possibly keep the business open a few more months if I stopped paying a few of the other creditors, thus keeping my workers employed a little longer.

I know my FICO score will drop when I file, but will it drop more if I stop paying bills before I file, or is the FICO drop the same no matter what?

Answer: The end result will be about the same.

If you stop paying some bills, those skipped payments will lower your score substantially. Once you file for bankruptcy, your score will drop some more.

But the effect of bankruptcy on your scores is so profound that you'll end up in about the same place as you'd be if you had filed without ever having missed a payment. Either way, your scores will be in the basement. If you believe bankruptcy is inevitable, consult a bankruptcy attorney now. It's easy to make mistakes that could endanger your bankruptcy filing.

You don't want to wind up with shattered scores but still owing these impossible-to-pay debts.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at www.asklizweston.com. Distributed by No More Red Inc.

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