Wealth preservation is often top of mind for people in or approaching retirement. You have likely worked to build good credit and properly manage your finances for several years. Having a good credit score in retirement is important for many reasons.
Thankfully, the actions you take before retirement to maintain a credit score are the same ones you will take after leaving the work force. Read on to discover why your credit score is important in retirement and how to maintain it.
Does retirement impact your credit report?
Retiring doesn’t directly impact your credit score. Your long-standing credit history won’t be impacted since your report does not display your income or employment status. However, although simply retiring will not affect your credit score, certain financial behaviors and changes to your lifestyle may.
For instance, when you retire, your income may decrease while your expenses remain the same. It’s important to consider your retirement income when making lifestyle changes to avoid having to take on debt. You’ll want to avoid taking out credit cards that you cannot pay back in order to fund your retirement lifestyle. Taking on credit card debt or neglecting payments will negatively affect your credit score.
Presuming that you’re able to manage your bills and budget after leaving the workforce, you should be able to maintain a good credit score.
How retirement impacts your borrowing power
Although retirement won’t impact your credit score, it could impact your ability to borrow money. This is because your income is likely lower in retirement than it was while you were working. When lenders evaluate borrowers, they look at several factors including debt-to-income ratios. This helps them decide if your income will be enough to pay back what you are borrowing.
If you have outstanding debt and are receiving a smaller amount of income in retirement, your debt to income ratio will be much smaller than it was before leaving the workforce.
Why your credit score matters in retirement
Many retirees assume once they retire that their borrowing days are over. However, this is far from the case for a good amount of retirees. In fact, in 2016, the median household consumer debt was $31,300 for those 65 or older. So, while pre-retirees are focusing on their next vacation, they tend to forget about the impact their credit score can actually have on their golden years.
Additionally, some retirees are still making large purchases in retirement. This may include a second home or a new car. Your credit score will help you to be eligible for loans and several other financial moves. Here are some of the most common ways a low credit score can cost retirees.
Higher interest rates
It’s common for credit companies to monitor credit scores for their existing clients. This helps them to adjust interest rates. If you have outstanding credit card debt, your credit card company may increase your interest rate if your credit score drops. The company also reserves the right to decrease your borrowing limit if your credit score declines significantly. In situations where your account gets flagged, they may even close your account. That’s why it’s important to maintain a high credit score to stay in favor with your credit card companies.
Lower insurance premiums
When insurance companies such as your auto or homeowner’s insurance providers evaluate potential customers, they take your credit score into account. They may use information from your credit report to decide what your rate is or if they will offer you coverage. The lower your premiums, the more money you’ll have to spend during retirement. So, keep your premiums as low as possible by maintaining a good credit score in retirement.
Many retirees choose to move during retirement. This may mean having to put down a security deposit at a retirement community or a new condo. Most rental agencies will run a credit report to determine your eligibility to live in the community and assess your ability to pay your rent or bills on time. If your credit score isn’t favorable, your new community may either ask for a larger security deposit or reserve the right to turn you away.
In addition to a housing situation, you may have to put a deposit down on other large purchases. This may include construction gear if you are building a new home, or something as small as a Wi-Fi router from your cable company. If you cannot prove good credit, you may be asked to put down a significantly larger deposit or be declined to rent the equipment in question.
How to maintain your credit score in retirement
So, how do you maintain or increase your credit in retirement? You continue building the same financial habits you did while in the work force. These habits include making your payments in full and on time, and several other positive habits. Here are a few actions you can take to maintain a good credit score in retirement.
Always pay on time
Making on-time payments is a huge step in making sure you have a clean credit report. Even one late payment can cause your credit score to drop tens of points. If you miss a payment, make a delayed payment, or have your balance sent to a third-party collection agency, it can severely damage your score long-term. Additionally, if you declare bankruptcy, it can take over a decade to build your score back up.
You may want to set reminders on your calendar to make monthly or bimonthly payments. Most credit card companies will accept payment over the phone and nearly every company accepts payment online. Make sure you stay organized and pay your balances in-full and on-time.
Keep your balances low
You may wonder how low you should keep your credit balances. The rule of thumb is to utilize less than 30% of the credit offered to you. For example, if your credit limit is $10,000, then you should never have a balance of more than $3,000.
If you’re worried about keeping a balance below 30%, there are two things you can do. First, you can keep it low by making more frequent payments so that your balance does not exceed 30% of your line of credit. Second, you can call your credit card company and see if they can increase your credit limit. This is only recommended if you are disciplined about your spending and can pay off the balance in full.
Avoid closing accounts with long histories
The age of your accounts is a factor in measuring your credit score. Even if you are not using a credit card, keep it open if it does not have a fee associated with it. This will increase the average age of your accounts and can help boost your credit score. This is especially true if you have a history of on-time payments with the accounts.
Maintain active credit accounts
While you should keep accounts open that you don’t need, it may be wise to keep them active. This may mean making a small purchase on them occasionally. Active accounts tend to help raise credit scores a bit more than cards that are not used. You may want to buy a tank of gas each month or put a subscription such as Netflix on the card to keep it active.
Review your credit report
While reviewing your credit report won’t impact the score, being aware of what’s on your report is beneficial for several reasons. First, when you know what is on your score, you will also be able to spot any potential discrepancies such as fraudulent activity.
Additionally, by reviewing your score, you are keeping your financial health top of mind. This will make it easier to make financial decisions that may impact your credit score.
You can check your credit score in a few different ways. Many banks offer a feature on their website where you can check your credit score. This is not an official report and does not place a hard inquiry on your credit. You can also use websites like CreditKarma to get automated emails every time your credit score changes.
You can also go directly to the credit reporting agencies such as Experian or TransUnion to get your credit score. Both agencies offer several free reports per year. This information can be found online or by contacting the agency by phone. You should review your credit score at least a few times a year, if not monthly.
The bottom line
Retirement is meant to be enjoyed. Stay vigilant in your financial habits so that you can access the freedom that your credit score offers. Make sure that you maintain your credit score so that you have access to lines of credit, low deposits and premiums, and can spend with ease.
If you’re looking for a financial planning partner who can help you maintain good financial habits, we have financial planning offices in Redmond, Seattle, Mill Creek, the Tri-cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.
If you’re ready to take the first step to achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals smoothly transition with confidence, and we’d like to do the same for you.