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Proper Credit Card Use for Baby Boomers
by Gary Foreman
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As people enter their 50s and 60s, how they manage their credit changes. Gone are the days when applying for their first store or bank credit card was exciting. Now maintaining the credit score they've earned and keeping things simple are more in order.
So how should boomers change the way they use available credit? Should they carry the same number and variety of credit cards? Or is it time to cancel some credit?
To help us answer these and other questions related to baby boomers and how they use credit, we turned to Michael Osakwe of NextAdvisor.com. Michael is a graduate of the University of California, Berkeley with a BA in Political Economy.
Q: As we enter retirement, our lifestyle and needs change. How would that affect how many credit cards we should have?
Mr. Osakwe: While an individual's financial needs might evolve over time, many might find that their relationship with credit cards likely won't change throughout their life. Even though their spending habits and use of credit cards may change as they age, all cardholders can gain from the benefits credit cards have to offer. For example, credit cards provide cardholders with payment protections they will not receive with other forms of payments. While this feature benefits all consumers, it might prove to be especially useful to seniors, who are often targeted by scammers. Additionally, credit cards are a useful tool for building and maintaining credit, and in many cases, seniors still need to maintain strong credit in retirement in order to access services like certain elderly care facilities. In addition, good credit allows for seniors to easily qualify for refinancing or borrowing if they decide to downsize, move, or need funds for other circumstances. Specific decisions regarding how to manage credit cards will, of course, come down to an individual's preferences and circumstances, but there is definitely a place for responsible credit card use in retirement.
Q: Many boomers have earned a good credit score. Can they afford to apply for new cards without affecting that score?
Mr. Osakwe: Provided that seniors responsibly apply for credit (meaning they solely apply for cards that they qualify for and don't apply for multiple cards at the same time), seniors won't have to worry about their scores taking a hit. While it's true that hard credit inquiries negatively impact credit scores, their effect is usually small if you're not applying for a massive amount of credit at a given time. Seniors, like everyone else, can reap the benefits of credit cards by being selective about what offers they apply for and making sure they qualify for any offer before they apply.
Q: Many of us have accumulated credit cards through the years that we no longer use. How can we know which ones we can cancel without hurting our credit?
Mr. Osakwe: Canceling credit cards is generally a bad idea because it immediately impacts your credit utilization ratio, or the amount of credit you're currently using relative to the total amount of your credit limits, which impacts up to 30% of your FICO credit scores. But, if you do decide to close a credit card, you're better off closing newer cards as opposed to old ones. That's because your oldest credit cards have the longest credit history, and thus, closing them makes you look less experienced with credit, at least as far as lenders are concerned. Additionally, the length of your credit history makes up 15% of your FICO scores, so closing older cards can have immediate negative effects on your credit. While this is something you can recover from if you continue to use credit responsibly, for some, this might not be worth the hassle.
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Q: Is maintaining a good credit score important for people in their 60s? Many of them have no need to borrow money.
Mr. Osakwe: Maintaining good credit is essential for people in their 60s because in general, seniors with better credit have more living options should they choose to enter a senior care facility and will likely benefit from good credit in the form of cheaper living costs. For example, expenses like monthly utility payments or even auto insurance tend to be cheaper for those with good credit. Not to mention, if a senior needs to fund an unexpected expense, such as a medical emergency, they will have the opportunity to borrow if they need to.
Q: Many boomers find themselves helping grandchildren financially. Is it wise for them to help grandkids establish a credit history?
Mr. Osakwe: Helping grandchildren develop their credit history is probably one of the greatest things boomers can do for them. That said, grandparents should make sure that they are actually working to help their grandchildren learn about money and credit, as opposed to bailing them out when they get in a financial pickle. Helping your grandchildren shouldn't require any spending, simply making a grandchild the authorized user of a credit card is an efficient first step towards helping them build credit. If a grandparent opts to do this, they should be sure that they not only lead by example, meaning they use the card responsibly, but also help their grandchildren understand the importance of responsible credit use, like paying their monthly payment on time and strategic spending. Once the child is old enough and responsible enough, grandparents can allow them to use the card independently or even help them open a credit card of their own.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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