Seniors are getting squeezed in so many ways. Healthcare and other basic expenses are rising. Fewer have pensions to supplement their Social Security income in retirement. Low interest rates mean what savings they do have isn’t growing quickly — unless they are willing to invest in higher-risk financial products.
And then there’s the other side of the equation: credit. Debt, credit report mistakes and identity theft can quickly bring down credit scores older Americans have carefully built over several decades. Here are five major credit mistakes older Americans make, and what to do about them.
1. Using Too Much Credit
Older Americans are increasingly struggling with debt. One study, the Demos’ 2012 National Survey on Credit Card Debt of Low- and Middle-Income Households found that Americans age 50+ have an average combined balance of $8,278 on all of their credit cards cards in 2012, compared with $6,258 of those under age 50. And researchers from Kent State University concluded that “the elderly are the population most likely to ﬁle for bankruptcy, with ﬁlings increasing by 150 percent from 1991 to 2007.”
Some of this debt is unavoidable. After all, the Demos researchers found that more than one-third of those over 50 who are carrying credit card debt are using those cards to pay for living expenses.
Compounding the problem, older Americans may be reluctant to reach out for help due to shame about their situations or fear of being scammed. They may also be pressured by debt collectors into making the situation worse, say by withdrawing retirement funds to pay off credit cards or even shelling out money to debt collection scammers who threaten dire consequences.
What to do: If you are having trouble repaying debt — and especially if you are thinking about tapping retirement funds to pay debts, or using a reverse mortgage to do the same — get advice from a reputable credit counseling agency and a bankruptcy attorney so you can make an informed decision about the best approach to handling your debt. And before paying debt collectors (for your debt or a family member’s) be sure you know your rights.
2. Not Using Enough Credit
The flip side of this coin is seniors who avoid credit as much as possible. Their car and home are paid for, and they use a debit card for purchases — or pay cash. While this is a great approach for saving money and sticking to a budget, it doesn’t help their credit scores.
Since credit reports and scores may be used for purposes other than borrowing, such as determining discounts for homeowner or auto insurance, careful avoidance of credit may mean these folks aren’t getting the best rates for those policies. And using a debit card rather than a credit card offers fewer consumer protections when it comes to fraud liability or billing disputes.
What to do: If you have no credit cards — or only one — consider getting a new credit card to add another reference to your credit reports. This can also serve as a back up when traveling, or can be used for safer online shopping. As far as building credit goes, it’s perfectly fine to use it sparingly and pay it in full.
A grandson who just graduated from college wants to get his first car, but doesn’t have a credit history. A daughter has gone through a divorce and asks her parents to cosign for an apartment. A child or grandchild wants to start a business but can’t get a small business loan. Whatever the circumstances, older Americans may find themselves agreeing to lend their name and credit to someone else’s loan. But they don’t always realize the risk they are taking when they do.
In the Demos survey, nearly a quarter of age 50 or older reported that some of their credit card debt was due to giving money to, or paying the debts of, relatives.
If someone cosigns and the primary borrower doesn’t pay on time, any late payments that are reported will also appear on the cosigner’s credit histories as well. And a cosigned loan counts like any other loan when credit scores are calculated. If the loan goes into default, debt collectors can — and will — try to collect from whichever borrower they think can pay. And in the meantime, the borrower and cosigner may be so embarrassed — or angry — with themselves or each other that the relationship is ruined.
What to do: If you want to help a relative financially, consider lending them money instead of cosigning. If they need to establish credit, help them open a secured credit card. You can lend or gift them the money they need for the deposit, without cosigning for the card. Already lent your name to a loan that went bad? You may need to step in and pay the debt to protect your credit scores from further damage.
4. Getting Saddled With Student Debt
Millions of older Americans are struggling with student loan debt. Consider these frightening student loan statistics from the Federal Reserve Bank of New York from the fourth quarter of 2012:
- Age 50 – 59: 4.7 million borrowers owe an average of $23,820 each, and 12.2% are 90+ days behind on payments.
- Age 60+: 2.2 million borrowers owe an average of $19,521 each, and 12.5% are 90+ days delinquent.
Even worse, an increasing number of borrowers who collect Social Security income are seeing part of their payments grabbed. While Social Security income is usually off limits to creditors, the government is allowed to take some Social Security income to pay back federal student loans.
While some of these borrowers may still be paying back loans they took out years ago, quite a few no doubt are struggling to pay loans they took out or cosigned for their children or grandchildren.
What to do: There may be no simple solution here, but for a start, parents and grandparents should avoid cosigning student loans. If it’s too late and a borrower for whom you have already cosigned isn’t repaying, help the borrower pursue all avenues for assistance, including income-based repayment or loan forgiveness. Similarly, older borrowers having trouble repaying their own loans should find out what programs may be available.
5. Not Checking Credit
If you aren’t planning on borrowing, you may figure there’s no need to check your credit reports or credit scores. Reportedly, only one in four seniors checks their credit score. But that can be a costly mistake. One study published in the CSA Journal found that 36 percent of those over age 60 who checked their credit reports thought there was a mistake in at least one of their credit reports from the three major credit bureaus, and in 17 percent of those cases, the alleged errors would have had a significant impact on one or more of their credit scores.
And then there is always the problem of identity theft. Eight percent of identity theft complaints made to the Consumer Sentinel database in 2012 involved those 70 and over, 11% came from those age 60 – 69 and 17% were reported by consumers age 50 – 59. Monitoring credit reports and scores can help consumers spot fraudulent use of their credit information more quickly.