When I told the grandparents they should check their credit report at least once a year, they looked at me as if I had lost my mind. They told me they don't need to worry about their credit score because they have a predictable income with social security benefits. They argued that even though they use credit cards, they don't really need them. Knowing how much debt they racked up since they retired, I figured it wouldn't hurt for them to improve their financial situation for the future.
According to a recent article by The Detroit News, most consumers started paying down their debt after the recession. However, people 60 and older experienced the steepest decline in credit scores. Only 51.5 percent of the 60 and older crowd had a solid FICO of 760 or higher last year compared to 55.4 percent in 2005. To help the grandparents understand why they need a good credit score even after retiring, I pointed out a few specific purchases they may need to make in the future.
Purchasing a new vehicle
I pointed out that the grandparents would need to replace their vehicle with 250,000 miles on it. By having a good FICO score, they will qualify for a better interest rate on their car loan. They argued that they will buy a golf cart to ride around the community. With no real savings, they would still need to put their golf cart on credit.
Refinancing a home
Even though our baby boomer elders assumed they could refinance and get the lowest rate, they found out the best rates are reserved for people with a high credit score. Now they are excited about the turnaround in home values. Although they don't need a high credit score to sell a home, they will need a good score if they take out a new mortgage. Even if they just rent, they needed to know that most property management companies check credit scores of prospective tenants.
Living on a truly fixed income
The grandparents said they aren't worried about credit scores because they will get a social security raise or cost-of-living adjustment. I encouraged them to look at the Social Security Administration's table of the estimated future cost-of-living adjustments. An increase between 2 and 2.8 percent isn't going to compensate for the interest owed on high-interest rate credit cards.
According to The Detroit News article, people who reduce their debt often improve their credit scores. Unfortunately, the debt of baby boomers increased from $49,330 to $55,200 between 2007 and 20012, which marks a 12 percent increase. Although I want to help the grandparents improve their credit scores, I refused to pay their credit card bills for them any longer. Instead, I worked out a realistic budget that allowed them to live below their means and pay off credit card debt. By the time they want to make a major purchase on credit, they should have the good FICO score they desire. I'm not sure they will follow the plan, but at least they have freed up some available credit on their cards in case of any financial emergency.
*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
More from this contributor:
- Financials Industry
- Banking & Budgeting
- credit scores
- credit cards