Senior Living: A good credit score is more complex than you might think

Unused credit lines can cause your number to drop significantly.

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I was overwhelmed with email responses to a recent column I wrote on credit bureaus. So, I thought it would be prudent to delve a little deeper into how your credit score can change over time.

A good demonstration is from a very nice reader named Marvin who wanted to know why his score had gone down over 30 points. You see, after diligently investigating the issue with Equifax, he determined that his credit score had dropped due to a credit line he had never used and had become dormant.

As an adviser, I would say Marvin did all the right things, like most of you do. He pays his bills ahead of time, does not carry debt balances month to month and is not a debt seeker by frequently applying for new credit.

It was a good idea for him to secure a line of credit to use in the event of a future emergency. I would say great planning; however, the credit bureaus, that rate consumers monthly, look at it another way.

Unbeknownst to Marvin, because his credit line was unused, it became dormant which shows an open “trade facility” on his credit bureau. Unfortunately, leaving a credit product open but allowing it to become inactive or dormant is the same as being late or delinquent.

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I know many of you may think this sound unreasonable, however it happens all the time to very good consumers. I have seen this a lot with department store cards that are opened for shoppers to get an instant discount on their purchases, only to receive a credit card in the mail, not activate it or use it and then it becomes inactive. This then drops their score and affects their credit worthiness for the future when they are applying for credit.

Car leases are another one that can drop your score. When your sales rep calls you to upgrade your lease and get you into a new vehicle for the same monthly payment — many people think this is a great deal — and it may be.

The problem is that the old car lease, because it has not been officially paid out and closed, but rather transferred to a new lease and a new vehicle, the old lease stays on your credit. So now it looks like you have two car leases when you only have one.

I once pulled a credit bureau report on a client who was getting a collateral charge at a major bank and he was turned down repeatedly due to this problem. He had upgraded his vehicle many times and it looked like he had six car leases when he really only had one. Of course, we fixed the problem by going back to the car dealer and having them close the leases properly, but for many people, they don’t even know this is happening to their credit.

In Marvin’s case, he suggested closing his line of credit, which I am sure you will agree is not a good thing to do just because your score may have dropped a little. Instead, you should review the credit you have (credit cards, lines or loans), and use it — even annually.

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Withdraw funds from your credit line or buy something with your credit card and then pay it back the next day, just to keep it active and in good standing. Do not let your credit rating drop because you are thinking you shouldn’t use your products. Inactivity or dormancy for a long period of time may prompt your bank to close the facility and often times it may be harder to apply for it later because the qualifying requirements and rates have changed.

Good financial planning doesn’t mean you just set things up and then forget about them — even though I know we all have better things to do. Please just use the credit you have periodically.

Keep a watchful eye on how creditors use your SIN and be mindful of automatic approvals for special offers and incentives. Banks will need to ask for your SIN when you open accounts or apply for credit, but other organizations may not legally require it. Be careful when giving out your number and make sure you ask what it is being used for. It is after all your credit, your number and your right to protect yourself.

— Christine Ibbotson has written four finance books, including the bestseller How to Retire Debt Free & Wealthy. She also writes the Moneylady column. askthemoneylady.ca

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