As we get older things such as credit, tend to matter less and less and taking on any additional debt risk as we get closer to the age of retirement is scary.
But what if I told you:
There is no need to be afraid of credit, and that you should be using it much more as you get older.
Today I will go over things you should already know (as a refresher), how you should be using your credit now, and what you can do to rebuild your credit if you have damaged it.
You Already Know This… Right?
At this stage in your life, you should know what your exact credit score is and all of the factors that will affect your overall credit like:
On Time Payments
Paying your bills on time is one of the most significant factors in your credit profile, this shows anyone who is interested in giving you any type of credit such as a loan, a mortgage, a car note, or a credit card that you can be trusted to pay back what you borrow.
Average Age of Accounts
Another huge factor is how long ago you opened your first trade line on your credit.
The way it works is that it averages out the total length you have had all of your accounts reporting on your credit.
If you opened up your first credit card at the age of 18 and you are now in your 50’s, your average age of all your accounts could be over 30 years.
Compare that to an 18-year old that just opened their first credit card and has an average age of accounts as less than 1 year.
This is important because creditors like to see that you have treated your credit right over a long period.
Credit Utilization (Credit to Debt Ratio)
Whenever you use your credit, you are increasing your credit to debt ratio, and if that number gets too high, it can affect your score and creditors will be more hesitant to give you additional credit.
For example, if you have a total of $50,000 in credit, but are using $45,000 of it, your credit utilization is going to be at 90%.
You basically have almost maxed out your credit so most lenders will look at this as a red flag and some of them will decrease your available credit.
It is best to try to keep your utilization under 3% but at most below 15%.
Whenever you request new credit, an inquiry is made to your credit report, the more of these you have, the harder it is to obtain new credit, and it can affect your credit score.
Lenders don’t like to see that you applied for 15 credit cards in the last 6 months, that makes them think you are desperate for credit.
It also doesn’t give them the ability to see just how you managed this new credit over such a short period.
Number & Mixture of Credit Accounts
Another major factor is the number of credit accounts that you have as well as the mixture of credit.
It is excellent if you have 22 credit cards; however, you won’t have the best credit score unless you also have other types of credit such as personal loans, car loans, a mortgage or a line of credit.
Lenders want to see that you can manage different types of credit as well and credit mixture is a factor in your score.
If you are lacking in any of the above areas it can really affect your credit in a bad way, while you can’t control the average age of your accounts, you can control everything else.
You Should Be Rewarding Yourself
There are only 3 things that I believe you should be using your credit for:
This is a huge one for me, there is nothing better than having cash on hand and maximizing your savings with rewards points.
Whenever my husband and I travel, we always get money off of the flight and usually our entire hotel stay is free and paid for by our rewards points.
Once you start using rewards points, you will quickly realize that there isn’t any other way to shop.
If you have the cash, you need to pay for it with your credit card, to get the points, and then pay off the balance immediately.
The older you get, the more you deserve to reward yourself, and credit card rewards are literally at your fingertips.
This is my favorite reason to use any type of credit because it gives you 30 days to pay it back and 30 days to test out theories and float expenses.
Believe it or not, but the average age of people starting a business is around 45 years old, this means that if you are reading this, you have already started a small business, or you are getting ready to start one.
There is no better time or reason to use your credit than for the purpose to create income.
This doesn’t mean you take $10,000 and go in 100% on an untested idea, but it does mean once you have proof of concept, use the funds to generate sales or to produce an item to sell.
As long as the use of your credit can create income for you, then it is always worth it.
I am sure I don’t need to say much here, but having an emergency fund is very important, and if you don’t have it in your savings account, at the least you can rely on your credit to get you through.
If you do have the emergency funds in a savings account, still use your credit cards to maximize your rewards points.
It’s Never Too Late to Start Over
My favorite thing about credit is that if you mess it up or damage it, it does an automatic reset for almost everything after 7 years.
I say almost everything because student loans and tax liens won’t be going anywhere, but things like, inquiries, charged off accounts, collection accounts, and medical bills are going to drop off your report and give you the opportunity to start anew.
In this case, time is on your side, along with time there are a few things you can do to help rebuild your credit:
Clean Up Your Credit Report
The first step is to dispute as many wrong items on your credit as possible, you also want to send letters to any of the collection companies to make them validate that you actually owe them a debt.
Fix any mis-spellings of your name and pay off any recent credit cards that have been charged off.
Any accounts that are close to being at their 7-year mark it is best just to ignore them and let them fall off your credit.
Take Out A Credit Builder Loan
We wrote a definitive guide at Credit Knocks on how credit builder loans work, but mostly they give you the option to add a positive tradeline to your credit without worry about your credit history.
How this works is that you will take a few hundred bucks and send to the credit builder lender, they will place the money in a locked account and issue it back to you as a loan.
You will then need to pay this loan back on time, and the lender will in-turn report to all 3 credit bureaus of your on-time payments.
Once you pay the loan back, they will send you back your initial investment.
Get a Secured Credit Card
Your next best option is going to be to get a secured credit card, you still have to send in the initial payment of a few hundred bucks, but it is another easy way to start re-establishing a good credit payment history.
These types of cards usually won’t decline you if you have messed up in the past, but they can have much higher interest rates, you can read more about them here.
Repairing damaged credit is more than just fixing the bad things, you also have to add more of the good stuff and adding additional items to your credit that is in good standing is a great way to start.
I know this is odd, but sometimes the only thing that can fix your credit is time, especially if you have taken most of the above steps already.
Time can help you by increasing your average age of accounts and also by getting you closer to a few bad things falling off of your credit report.
It can also decrease the impact of inquiries or certain charged-off items or bankruptcies.
If you aren’t living your best credit life then it is time you take action, follow some of those above steps and maximize your rewards.
Don’t be afraid if you messed your credit up in the past, you can fix it with a little TLC and some time. Obtaining credit is relatively easy, the real work comes with maintaining it.
About the Author:
Sa El is the Co-Founder of Credit Knocks. He is a Licensed Life and Health Insurance Agent with over 10 years of experience and a Licensed Real Estate Agent. He is an Entrepreneur, Credit Educator, and Content Writer.