From their first
gas credit card after high school graduation to a financial world filled with
rewards cards and penalty rates, baby boomers have seen the use of credit
change dramatically in their lifetimes. And now they wonder how all these
changes will affect them as they head into retirement. So let's take a look at
six credit questions all boomers will need to answer:
1. How do boomers'
credit scores stack up?
According to
Experian's Generational Credit Trends Report, they do pretty well. Boomers'
credit scores were about 4 percent above average. They score higher than
average in most categories measured, except they are more likely to have a
second mortgage.
2. How did this get
on my report?
Credit scores
include a lot of different inputs. So it's not unusual for boomers to make
financial decisions without recognizing the effect on their credit score.
Sometimes the result is a surprising entry on their credit report.
Gerri Detweiler,
director of consumer education for Credit.com, points to a couple of common
situations: "Boomers often find themselves saddled with other people's
debts, especially their kid's. This may include cosigning for cars, student
loans, or even homes. The big danger is that if the primary borrower can't pay,
the cosigner ends up responsible for the debt. Even if the bills are paid on
time, the debt will usually be included on their credit reports and affect
their debt ratios and credit scores."
3. Could my credit
score get sick?
Just as a sudden
illness is more likely to strike as you get older, the same holds true for
boomer credit scores. That's because medical bills can seriously affect
boomers' finances. According to Detweiler, if a medical bill goes to
collection, expect a big hit on your score. "One study found that medical
bills accounted for about half of all collection accounts on credit
reports," she says.
4. Can I have too
much credit?
Many boomers find
that they don't need much of the credit that they have built up over the years
and that is still available to them. Naturally, they wonder if their credit
score would improve if they cancelled some available credit.
Detweiler believes
that's not necessary. "Those big credit lines don't hurt," she says.
"If you get your credit reports and see open available credit lines totaling
tens of thousands of dollars, you may be tempted to close some, thinking all
that available credit makes you a greater credit risk. But that's not the case
with most scoring models, which are more concerned with the debt you are
carrying than your available credit. So you're usually best off just leaving
them alone."
5. Will being close
to retirement hurt my credit score?
Actually, the
opposite is true. Detweiler explains: "The fact that you have been using
credit for many years helps your credit scores. Most scoring models take into
account the average age of your accounts, as well as the age of your oldest
account. So be glad you have all that experience under your belt. It's
something you can't fake."
And a lower
retirement income level does not affect your score. So while a drop in income
might make paying bills more challenging, that alone won't hurt your credit
score. But it is a good warning about debt. Ideally you'll have houses, cars,
and credit cards paid off prior to retirement.
6. I don't need to
borrow money anymore. Why should I care what my score is?
Tempting as this
is, you probably don't want to blow off your credit score. Credit scores are
used for much more than just issuing credit.
For instance, you
may be a boomer who chooses to work for a few more years. Don't be surprised if
a potential employer checks your score. If you have an auto or homeowners
insurance policy, there's better than a 50/50 chance that the insurer will
consider your credit score in determining rates and discounts.
As boomers head
into retirement, they may be able to leave the daily grind behind them, but
they'll still need to monitor and manage their credit to avoid unpleasant
outcomes.
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