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.
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.
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.”
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.