Because of the way that credit scores and creditworthiness are determined, people who choose closing accounts once paying off the balances may quickly discover it was a bad idea.
This is something that is particularly dangerous for seniors as they approach the payoff date of their mortgages and automobiles.
Recent studies show that the disappearance of these “good debts” may actually harm seniors because they no longer possess an actively improving credit ratio, which leads to a much higher credit score or, what’s worse, no credit score at all.
Liz Greenwood, a credit counselor with Clarifi, a nonprofit consulting firm in Philadelphia, says that the worst part of it is that seniors usually don’t even understand why this is a problem and many of them do not consider it a problem at all.
Sure, a senior who has recently paid off their major debts (their automobile and home) may not have much use for credit right now, but that doesn’t mean that their financial situation will not change in the future.
The instability of the economy, the rising costs of health care, and the shrinking status of social security may all, in time, negatively affect a senior citizen who is retired, especially if they are on social security and Medicare; which means they may have a need for credit in the future.
Unfortunately, when a consumer has coshed closing accounts, one with a lengthy period of inactivity, or no open accounts at all, FICO cannot produce a score at all, even if the person applying for the credit account has a stellar credit history.
To be more exact, FICO, a leading credit score maker, reports that a consumer has to have three things in order to generate a score:
- An account that has been open for at least six months
- An account that has been recently updated by a creditor or lender (within the past six months)
- The absence of a death notice on file
Obviously, these are things that can greatly affect a senior who coshed closing accounts. There are a few ways that seniors can experience these affects even with their good credit history and responsible credit management:
- Seniors who have chosen to sell their home and move into an apartment may not receive approval as many landlords check FICO scores. By not satisfying one of the listed requirements, the FICO score may be poor, which will likely lead to an application denial.
- Speaking of moving, if a senior chooses to move into a new place they will have to set up a new utilities account. FirstEnergy Corp and Inland Power, power companies in the Northeast and the Pacific Northwest, respectively, state that they most definitely observe FICO scores in order to determine whether or not a new customer must put down a deposit before they can open their account. Patti Michel of FirstEnergy reports that this deposit could cost a consumer upwards of $800, depending on the state of residence.
- Some seniors may want to co-sign a loan for their adult child or a grandchild for their own apartment lease or auto loan. Some lenders, of course, look at the FICO score in order to determine approval status, so by not satisfying the above requirements this could lead to a denial.
- As mentioned, these are tough times and as such, a new credit account may be necessary in the near future for a senior without a major source of income. A representative from Wells Fargo says that a poor FICO score may influence the approval rate of a new credit card too.