Life is very different in your 20s, when you're fresh out of school or brand-new to the workforce, from life in your 40s, when you're planning for retirement and possibly your kids' college tuition. And making decisions about how to handle your credit changes depending on how old you are. So how do you decide on the best strategy? That's as easy as acting your age.
"In your 20s, the key challenge is learning to live within your means and avoid credit-card debt," says Manisha Thakor, co-author of On My Own Two Feet: A Modern Girl's Guide to Personal Finance. Open up your first credit card, and start building a healthy credit score by establishing good habits: monitor your credit report annually and pay credit-card balances on time. "Timeliness of payments makes up 35 percent of your credit score," Thakor says. "You may think a late payment is no big deal, but it really is."
Life is coming at you fast, but don't open up lots of credit cards -- it can hurt your score. "Roughly 10 percent of your score is based on the number of recent credit applications," Thakor says. And if you're shopping for a home mortgage or car loan, limit those inquiries to a brief time period.
About a third of 30 somethings don't have 401(k)s, according to human-resources consultants Hewitt Associates -- but an investment plan is a must. People in their 30s should invest 10 to 15 percent of their income in a 401(k) -- the more, the better, says Wes Moss, director and chief investment strategist at Capital Investment Advisors in Atlanta. If your employer matches funds, at least set aside enough to qualify for the maximum matching benefit.
"Forty is the new 20," says Gordon F. Homes, senior financial planner at MetLife. "Most people will continue changing careers and jobs and even homes throughout their 40s and 50s. Don't forget to manage your retirement savings from previous employers, either at that employer or by consolidating those accounts into a traditional or Roth IRA."
Even if you've already bought your first home, your credit score is still important if you need a car loan or a home-equity loan. Keep monitoring your score, Homes says, and strive for a zero balance on your cards. If you need to carry a balance, keep it under 50 percent of your credit limit, Thakor says: your "debt-utilization ratio" -- your balance divided by your credit limit -- accounts for 30 percent of your credit score.
By now, you probably have several types of debt: credit cards, a mortgage, car loans. That's not necessarily a bad thing, says Thakor: Lenders want to see that you can manage different types of debt, and diversity of loan types accounts for roughly 10 percent of your credit score. But pay your bills on time.
One way to reduce your debt is to downsize your home. "Selling a primary residence where you have lived for at least two of the past five years may entitle you to a capital-gains tax break on the profit," says Judy Ward, a senior financial planner with T. Rowe Price. If you're thinking about buying a new home, checking your credit report could save you thousands of dollars.
You might also consider buying a long-term care policy, which you can get at a better premium in your 50s. "Americans don't realize that Medicaid's coverage of long-term care doesn't kick in until you've exhausted nearly all of your savings," Homes says. "And while Medicaid covers nursing home care for people who qualify, coverage of in-home health services is limited, and Medicaid usually does not cover assisted living."
You may be tempted to close some of your credit cards as your peak spending years wind down. But the length of your credit history accounts for about 15 percent of your score. "While I'm all for paring down, keeping your longest running credit card open is a good way to keep your credit score in good standing," Thakor says. And consider delaying your retirement, especially if your nest egg has taken a hit. Each year between 62 and 66 that you delay collecting Social Security can increase the benefit by about 7 percent.
Now that you've got a decade-by-decade money roadmap, get on course for a solid financial present and future. The key is to take action now, no matter how old you are today. You'll thank yourself in your golden years.
Tamar Snyder is a writer in New York City who covers education, personal finance, and careers.