According to conventional wisdom, young adults are the ones who most need to worry about their credit scores because they’re new to managing debt. But the truth is, people over 50 face five financial situations that can really dent their credit scores.
Below are five score dingers and how to fix them. (If you're not sure whether you have a problem, you can get a free annual credit report from Annualcreditreport.com.)
1. Getting Divorced
One of the most common hits to a boomer’s credit score can be divorce, says Katie Ross, education and development manager for American Consumer Credit Counseling, a nonprofit based in Auburndale, Mass.
(MORE: Found a Mistake in Your Credit Report?)
The reason for this is that divorced individuals often continue to be held responsible for jointly held debt incurred while they were married. (See the Next Avenue blog post by Kerry Hannon: Don’t Let Your Ex Ruin Your Credit.)
“This happens way more than you would think and often years after the divorce,” says Todd Huettner, a mortgage broker at Huettner Capital in Denver who specializes in credit repair. “I’ve seen one late mortgage payment by an ex-spouse lower the other's credit score by 100 points" even though that person is no longer responsible for the payment.
The fix: The best way to repair this kind of nick to your credit score is to get your ex-spouse’s history off your credit report. “Contact creditors and provide them with a copy of your divorce document that outlines who is responsible for which debt,” Ross advises.
Even if your divorce decree requires your ex to make the debt payments, until your name is off the loan or credit card, you and your credit score are still on the hook, Huettner says.
2. Forgetting Medical Co-Pays
Getting older typically means more trips to the doctor, and that can lead to an increased chance of forgetting to make a health insurance co-payment. A missed co-pay at the doctor’s office might seem trivial, but even an unpaid $10 or $20 can dent your score.
“I see this frequently with older adults because they’re more likely to consult specialists as new patients and don’t notice that a co-pay is due,” Huettner says. “It’s common for these types of ‘little things’ to end up in collection. Then one missed co-pay can easily lower your credit score by 50 to 100 points.”
The fix: This is one of the easiest credit score dents to undo, Huettner says. If you find the co-pay error on your credit report, contact the doctor’s office to settle the mistake. “Most of the time, they will let you pay the debt or make payments, so you can get the collection removed from your credit report,” Huettner says.
When you speak to the doctor’s office and straighten things out, ask for a letter that you can then send to the credit bureaus. “Once the bill is paid in full, you might want to send the letter to the collection agency, too, so they also report the debt as paid,” Huettner says.
3. Co-Signing Your Kids' Loans
More parents are co-signing home and auto loans for their adult children as a result of tighter lending and credit requirements. But if your kid misses a payment, that could shave up to 50 points off your credit score.
The fix: Make sure your son or daughter doesn’t miss a payment by having him or her open a bank account with the equivalent of three to four months’ worth of loan payments. “Have them make payments out of the account one month in advance and send you proof of that payment,” Huettner says. “This will allow you time to step in, if necessary, to protect your credit score.”
4. Shopping for a Few Loans at Once
When you’re in your 50s or 60s, you might find yourself inquiring about applying for multiple loans within a month or two — maybe a refinanced mortgage and a new car loan. If so, all that research could lower your credit score for a year, says John Ulzheimer, a credit card analyst and founder of CreditExpertWitness.com.
The fix: If you’re gearing up to apply for multiple types of loans, do all your comparison shopping within a short period of time to ensure the minimal impact on your score.
5. Closing Credit Card Accounts
When you close a credit card account, you lose the amount of available credit on that card. This increases what’s known as your credit utilization ratio, or CUR, a figure that compares the amount of credit you've used with the total amount of credit you have available. The way to maximize your credit score is to have a low utilization ratio.
“Your CUR should be no higher than 30 percent, preferably even around 10 percent if you're trying to maintain a high FICO score,” notes Beverly Harzog, a credit card expert and consumer advocate based in Johns Creek, Ga.
The impact on your score from closing your credit card accounts will depend on your utilization ratio.
“Most people over 50 have several credit cards and a long credit history, which can help lessen the negative impact,” Harzog says. “But if you plan to close a card with a high credit limit, it could ding your score significantly because your CUR will shoot up.”
The fix: If you're planning to close a credit card account because you'll be replacing the card with a different one, do what Harzog suggests: Wait until you receive the new card and start using it before you close the old account. “That way," she says, "your new credit limit is incorporated into your utilization ratio.” And your plastic switch will go off without a scratch.