Use it or lose it
Good credit is like a muscle: You either use it or lose it. And that can be an issue for a lot of empty nesters and retirees.
Empty nesters, baby boomers and retirees have a big advantage when it comes to credit. Not only do they have a long history of using it — a big plus for the credit score — but often they also have deep-sixed a lot of their debt.
“(They) are probably financially in a much different position than younger cardholders, from the standpoint that most of their debt has been retired,” says Norm Magnuson, vice president of public affairs for the Consumer Data Industry Association, a trade association for consumer reporting companies.
But empty nesters and retirees also have some special credit needs and concerns. While they might not use credit as much as they did in their 30s and 40s, their scores — which can determine what they pay for insurance, if they pass muster with leasing and utility companies and whether issuers will maintain credit limits — are still important to their financial well-being.
Want to keep your credit strong and vital as you sail into and through retirement? Here are seven strategies to help.
Recognize that time is on your side
Credit scores reward longevity. The longer you’ve held an account with a good record, the better it is for your score.
Because many empty nesters and retirees have credit accounts they’ve maintained for 20 or 30 years, that gives them the edge when it comes to getting good scores, says Barry Paperno, consumer affairs manager at FICO, the company that created the FICO score. Even some small mistakes will hurt less with decades of good behavior to dilute their effect on the score, he says.
This benefit is also a good reason not to close long-held accounts just to simplify finances as you approach or enter retirement. Eventually closed accounts will come off your credit report, which could shorten the length of your credit history and negatively affect your credit score.
Closing accounts can also lower your score for another reason: Your available credit decreases. Because a large part of your score looks at how much credit you use versus how much credit you actually have, decreasing your available credit affects that ratio and can lower your score.
Don’t worry about your credit ‘mix’
Scoring models give you points for various things that the score developers see as signs of responsible credit management. One of the items on the list: You carry a mix of different types of credit.
Having a mix of credit means you have revolving credit such as credit cards, and installment credit such as a home, car or furniture loan, and are handling both types well.
As you get older and pay off loans, it’s possible that you will find yourself with just revolving credit.
While that might be an issue for a younger consumer, it’s not a big deal for an older one, says Paperno. “It’s a very minor issue, especially for people in this stage of life,” he says. “They do not need to worry about that.”
Nix the co-signing
What you may not realize: If you co-sign for a card or loan, it’s added to your credit report just as if it’s yours. And that debt is included in your debt load if you apply for credit or a mortgage.
It can also sink your credit score. When you’re using a higher percentage of your available credit, your score can go down. If you have $10,000 in available credit on your credit cards and charge $1,000 total on your cards, your utilization ratio will be 10 percent. Staying under that utilization ratio is optimum for a good credit score. However, if your adult child maxes out that co-signed card at $5,000, you’re now using 40 percent of your overall available credit. And your score would likely drop.
You’re also on the hook for the debt if the borrower defaults.
“I am not a fan of co-signing under almost any circumstances,” says John Ulzheimer, formerly of FICO, and president of consumer education for SmartCredit.com. For empty nesters and retirees, it can be especially detrimental, he says. On a fixed income, “co-signing for a loan is like having a piano dangling on a string over your head,” he says.
Use the cards occasionally
One nasty surprise for some retirees with a lifetime of great credit: They have no credit score.
If you’re not using credit — your house and car are paid off and you have a few cards you never use — then there is no activity for creditors to report to the credit bureaus to generate a score. At the same time, if issuers notice you haven’t been using their cards for more than a few months, they may decide to close your accounts.
From the issuer’s point of view, “it doesn’t make sense to have that exposure not generating income,” says Ulzheimer.
One fix: “Once every two or three months, put some kind of charge” on your card, says Paperno. “It doesn’t have to be much — coffee, a candy bar.”
Just how long a card can stay inactive without the lender closing the account will vary with the card and institution, says Paperno. “Basically, that’s up to the lender.”
Small, sporadic usage combined with paying bills in full will keep all of your cards oiled and in working order. Since you’re not carrying a balance, you’re maintaining credit without racking up debt.
Don’t linger in the ‘no-score’ zone
You apply for a loan and find out you don’t have a score. Now what?
Not to worry, says Paperno. The answer could be as easy as buying a pair of socks.
First, get a copy of your credit report, he says. ” If you have something like an old retail card or gas card, use it,” he says. “That will generate a score.”
All of your old accounts are still on the report; there just isn’t any recent activity, so the scoring formula can’t generate a score.
Years ago, he counseled a man in just that situation who was trying to get a mortgage. Paperno remembers the man saying, “I’ve bought and sold homes, put my kids through college and bought and sold cars — and I have no credit score?”
Paperno’s solution: Grab an old retail credit card that’s still active and buy a pair of socks. That small credit purchase would allow the FICO formula to generate a score.
From a practical standpoint, the scoring system doesn’t always make sense, Paperno says. Buying a pair of socks to get a house, he says, “is kind of goofy when you think about it.”
Look out for ID theft
Always a hot issue: identity theft.
One answer that may work better for empty nesters and retirees than for younger folks: a credit freeze, says Magnuson.
When you freeze your credit, it means you’ve told the credit bureaus they can’t pull your credit history. Since just about any lender requires a credit history before granting a line of credit, loan or credit card, a credit freeze is a good way to stop people posing as you from opening credit in your name.
When a lender or business needs access to your file for a credit check, you can “thaw” your freeze by using a PIN that only you know. You can freeze it again once the lender has checked your history.
“A file freeze says no one can get your information unless you allow it,” Magnuson says.
Check credit reports every four months for free
Free credit reports weren’t available when today’s empty nesters and retirees started managing their finances, says Ulzheimer. For that reason, many may not be used to asking for them, he says.
The quick summary: You have three different credit reports, one each from each of the three credit reporting agencies — Equifax, Experian and TransUnion. Under federal law, you’re entitled to a free copy of each report every 12 months from AnnualCreditReport.com.
Many credit gurus recommend requesting one of the three reports every four months. “They generally get all get the same information from lenders,” says Magnuson. That way, you’re staying current with your history and paying nothing for the privilege.
Retirees generally have a little more time on their hands, says Magnuson. And the credit report-identity theft issue “takes on more importance because every dollar counts,” he says.
Are you going to be making a big purchase where a good credit score could save you money in interest? Pull your credit reports well in advance. In case there are any errors on the report, Paperno says, you want to “give yourself some time because they’re not going to be fixed immediately.”