Stan's World - Strong Credit

If you have certain credit cards, you may occasionally receive credit alerts that tell you your credit score went up or down a few points. I get them regularly from my Capital One card, and I typically disregard them. In fact, if you’re also a senior, perhaps with no mortgage or car payments, and no interest in more credit cards, does your credit score even matter? Despite my flippant attitude toward my credit score alerts, credit scores for seniors do matter.  

Most of us know about the benefits of having a good credit score when you’re young and looking to use credit. A good credit score gives you access to a wide range of credit cards. It also signals to banks that you’re a low risk for a mortgage to buy a house, to lease or buy a car, or to take out a loan to pay for your children's college. 

Less well known, but relevant, is that a good credit score also affects the interest rate you pay for those loans. Someone with a high credit score is viewed as a lower risk and less likely to default on a debt, so they earn a reduced interest rate. In fact, a good credit score makes them a target, which is why they receive so many unsolicited offers for new credit cards.  

While a senior may not worry about buying a first house or upgrading to a larger one, they may eventually want to downsize and move to an apartment or condo. If you’re renting, a landlord or property manager may check your credit; if you’re financing a condo purchase, your lender certainly will.

And what if a grandparent wants to co-sign an education loan for a grandchild (or six)? Once again, a poor credit score will likely result in either a loan denial or a higher interest rate if approved.

And let’s not forget about auto and home insurance. Any idea how insurance companies set their rates? In many states, insurers may use credit information or a credit-based insurance score as part of the equation.  

What if there’s a family emergency and you need to obtain a home equity line of credit to bail a family member out of trouble? Even if your home has no mortgage, banks don’t have to give you a home equity line of credit. Your credit score will be one of the factors the bank considers.  And let’s not minimize how embarrassing it would be if a grandchild asks you to co-sign a loan to buy their first car, rent their first apartment, or borrow money to attend graduate school, and a low credit score prevents it. 

If you’re a senior with a good credit score, you may wonder how to maintain it when you no longer have a full-time job. Fortunately, credit reporting agencies aren’t concerned with current income, so a senior on a fixed income will not necessarily have a lower credit score because his/her income dropped. 

Of course, many seniors try to pay off their mortgages, car payments, and credit cards, and those all impact credit scores. Fewer loans and payments:  

• Changes your credit mix: Credit-scoring models consider a variety of debt (e.g., mortgage, car, credit cards) that is consistently paid in a timely manner.
• Reduces the number of active loans: Paying off loans reduces the number of open accounts on your credit report and can change your credit mix, although the positive history of paid-off accounts may remain on your report for years. 
• Can change your credit utilization ratio: Your credit utilization ratio compares your outstanding credit card balances with your total available credit. Even if you no longer use a credit card, keeping the account open generally preserves its available credit and can help keep your utilization ratio lower. For example, if you have $10,000 in reported credit card balances and $100,000 of available credit, your credit utilization is 10%. If you close a credit card with a $20,000 credit limit, your available credit would fall to $80,000 and your utilization would increase to 12.5%. That may not be significant, but it could be enough to reduce your credit score. (TIP: If you have an old credit card with an annual fee, call the credit card company and ask them to switch you to a card with no annual fee.)
• May affect your length of credit history: While payment history for closed loans or credit cards may remain as part of your credit report for years, keeping an older no-fee credit card open can help preserve available credit and, depending on the scoring model and circumstances, may be beneficial to the overall credit profile.  A long, timely payment history strongly contributes to a good credit score.

If you’re a senior, a high credit score may no longer be a goal. In the event you may need more debt in the future, keep your credit accounts current and avoid allowing other obligations, such as utility bills, to become delinquent and wind up in collections.