With age comes wisdom, or so we’d prefer to think. The experiences we’ve lived through, whether positive or negative, add to our understanding. However, some matters, such as the ever-changing world of personal finance, can move at such a rapid pace that experience will only get us so far. When we reach our senior years, we may feel that we’ve seen it all, financially speaking. But, one of our most important financial tools, our credit score, requires some special attention as we age. While the factors that comprise your credit score remain the same, payment history, amounts owed, and so on, the distribution of activity throughout these factors is changing with time.
That’s because our financial needs are prone to change as we grow older. Past a certain point, the older you are, the less debt you carry. The student loans are paid off; the home is paid off, and you don’t need to replace your car as often because you may be driving less. It stands to reason that most older consumers are less likely to purchase new homes or other big-ticket items, or to rely on credit cards, but taking into account the way your credit score is derived, letting your credit go entirely dormant may not be such a great idea. It can cost you.
You can avoid this unpleasantness by giving your credit a regular workout. Just like with our bodies, there’s a price to pay for inactivity. First, many creditors have policies to close credit card accounts for prolonged periods of non-usage. Closing an account impacts two portions of your credit profile: Length of History and Amounts Owed. The longer you maintain an account, the more it adds to your track record of using credit responsibly. If an account is closed, it will no longer count toward your history. Also, a closed account no longer counts toward the percentage of available credit used, which is a factor within the Amounts Owed category. This portion of our credit score looks at the ratio of how much credit we use versus our total credit limit. When an account closes, it decreases the amount of available credit, increasing your usage ratio and reducing your score. The good news is you don’t have to rush out and get a summer home in Florida or charge everything under the sun to beef up your credit profile. You can “work out” your credit by making little charges here and there for things you needed to buy anyway, and then paying them off in full when the bills arrive.
Another way to ensure the health of your credit score is to review your credit profile regularly. Mistakes can pop up on your report without warning, and you also have to be on the lookout for identity theft; therefore, it’s vital that you review your reports at least annually. We all have three credit profiles at any time, one with each of the major credit reporting agencies – TransUnion, Experian, and Equifax, and we’re entitled to a free copy of each report every 12 months. Ordering copies of your reports is simple. Visit AnnualCreditReport.com, complete the required information and you’ll receive copies of your credit profiles in no time. When you get them, look each over carefully. You want to be on the lookout for anything strange like an incorrect mailing address, a Social Security number variation, unrecognizable accounts, and any kind of negative information that shouldn’t be there. If there’s anything wrong with your profile, your reports will provide instructions about how to dispute the items in question.
It’s not all doom and gloom. Because of your long history using credit, any missteps will generally impact your score less than they would for someone who’s just starting out. That’s because your Length of History is also a factor in your score. When you’ve managed accounts over decades, your profile has a depth of information that describes your typical credit usage. A late payment at this point in your life can have a far less dramatic impact on your profile; however, you still want to avoid any actions that could adversely impact your score. Remember: in some states your credit profile can be used to determine the amount of your insurance premiums, the cost of a lease – they’re even used in some places with utility accounts. Failing to maintain your profile by using credit strategically can cause your score to destabilize over time and contract. If that happens, you might find yourself paying more for financing than you should.