For most people, a credit score is something to worry about earlier in life. Debt, in general, usually peaks between ages 35 and 54. So it’s understandable that you may view retirement as a time to finally disregard those vaunted three-digit numbers. However, as The Wall Street Journal recently reported via Fidelity, your credit score means a lot more in retirement than you might think, and it can fall faster than you realize if you’re not careful.
Do you have questions about managing your finances in retirement? Speak with a financial advisor today.
Retiring Can Hurt Your Credit Score
The problem is simple. Many people take retirement as a chance to get out of debt and, according to the credit rating system, that makes them less reliable borrowers. As Imani Moise of The Wall Street Journal wrote:
“Even people with pristine records of on-time payments can expect their scores to slip after they stop working. While stopping work or living on a fixed income won’t ding your credit directly, scaling back one’s lifestyle in retirement or paying off old loans can affect a score … Retirees typically have longer credit histories, which keep overall credit scores healthy, but closing decades-old accounts, even inactive ones, can cause a steep drop in your score.”
The problem has to do with how the rating agencies score your credit. In general, they look to see if you are currently making payments on your debt, and assess the nature and mix of that debt. Ratings agencies particularly weigh five specific variables:
- History of late and on-time payments
- Length of your overall credit history
- How many old vs. new lines of credit you have
- Mix of different types of credit
- Credit utilization ratio, meaning the amount of your allowable borrowing that you use
An ideal borrower has a long history of on-time payments and is currently making payments on a mix of different longstanding accounts, of which they’re well under the credit limit. So eliminating debt, as many retirees do, can hurt some or all of these variables.
For example, as an Equifax article points out, “paying off your only installment loan, such as an auto loan or mortgage, could negatively impact your credit scores by decreasing the diversity of your credit mix.” Meanwhile, paying off and closing out a credit card would hurt your utilization ratio by lowering your total available credit.
And in all cases, paying off debt eliminates the chance to keep making on-time payments. The longer between each debt payment, the more your credit can drop. If you have made no debt payments of any kind for six months or more, rating agencies may even begin to eliminate your score altogether, leaving you what the industry calls a “ghost.”
Why Your Credit Matters in Retirement
Unfortunately, this matters for retirees. Low credit may make moving, buying a new car or even opening a new credit card more challenging.
But there are retirement-specific implications, as well. “Scores are used in a range of insurance and healthcare decisions, from setting your premiums to whether you are accepted to an assisted-living facility,” according to The Wall Street Journal article.
Maintaining good credit can determine the kind of insurance coverage you can get because it often affects your premiums. It can certainly apply to a variety of financial situations when you may need sudden access to cash.
How to Manage Your Credit as a Retiree
It’s important to remember what a good score entails. Most lenders consider anything above 670 “good,” so don’t panic over a small dip below 700. Beyond that, one of the best things you can do is to maintain a series of accounts with regular payments. For instance, you can keep some accounts open and charge to them every so often, but you’ll want to avoid piling up any balances beyond your means.
For many retirees, this can be as simple as keeping a couple of credit cards open and on autopay. You can use one to pay your electric bill each month and another to pay the phone bill. Then, if you want to maintain a debt-free life, keep them in a desk drawer. They will quietly tick away, automatically paying your utility bills and automatically paying themselves from your bank account and reporting that history back to the rating agencies. It can be worth keeping up the effort in case you need that credit history on hand.
Many people use retirement as a chance to finally live debt-free, but keep in mind that your credit score could plummet in retirement. Periodically using credit in retirement can help you maintain your score and improve your financial flexibility, should you need it. This can also be especially valuable when it comes to health insurance and other factors.
Retiree Credit Management Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Credit plays an important role in most people’s lives, helping them qualify for mortgages, car loans and more. But even people with high credit scores should be vigilant about maintaining their credit. Here are three mistakes that people with good credit should avoid.
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