Before retiring, it’s important to eliminate or reduce debt as much as you can. When…
You might think your credit score no longer matters after you’ve retired. In a few cases, that’s true. After all, you’re probably not buying a home, or taking out a business loan. In retirement you’ve left all that behind in favor of European vacations, trips to the park, or rounds of golf. But there are several good reasons why you should keep paying attention to your credit record in retirement.
1. Changing your credit card. One way to cut costs in retirement is to switch to a credit card with more favorable rates. Although you won’t want to rack up credit card debt in retirement, having a credit card can be convenient for some larger expenses, and you can get cash back or other rewards. There are many banks and credit card companies, and you’ll do well to comparison shop for the best programs for you. But you’ll need a good credit score in order to get the best terms and rates.
2. Refinancing your mortgage. You may be carrying a home mortgage in retirement. Almost 40% of retirees are. With interest rates at historic lows, you might be interested in refinancing to lower your monthly payments. But this is only feasible with a good credit rating. A good credit score can help you get a lower interest rate, which can save you thousands of dollars over the remaining length of your loan.
3. Reverse mortgages. If you ever decide to apply for a reverse mortgage, your credit score is a factor in determining the terms you receive. Previously, reverse mortgages did not require credit checks, because there are no monthly payments required – the loans are typically repaid from proceeds of the eventual home sale.
Under the new federal standard for financial assessments, lenders are now required to assess whether an applicant has “demonstrated the willingness to timely meet his or her financial obligations by analyzing the mortgagor’s credit and property charge payment history.” As part of this assessment, the lender must obtain your credit report and verify the applicant has made debt payments on time and has no derogatory credit, including payments more than 90 days late.
4. Insurance. Many car insurance companies use credit-based scores to help determine risk, and thus your insurance rates. Statistical studies indicate that those with higher credit scores tend to have fewer accidents and cost insurance companies less than those with lower scores.
Your credit score helps determine how your car insurance company sets your rates. The company will periodically check your score to help decide whether to adjust your rates. And if you want to change companies to lower your rate, your credit rating will affect the rates you’re eligible for.
Your credit score likewise affects your homeowners insurance premium. Insurance companies look at applicants’ and policyholders’ credit scores to help determine how likely they are to file claims.
5. Rent. If you ever decide to relocate or downsize, and rent a home or apartment instead of buying, your credit rating is usually a major factor in determining whether you are accepted. Landlords are very interested in your ability to pay rent on time each month. The minimum credit score threshold is typically lower than that for a home mortgage, but a low credit score can lead to your rental application being turned down.
6. Helping your kids. Although we don’t recommend it, you might decide to help your children or grandchildren with student loans or co-signing on their home or car loans. Your credit rating will have a big role is determining what types of loans you can get and what interest rates and terms you get.
7. Detect identity theft. Identity theft has become a huge criminal business, and seniors are a prime target. By carefully monitoring your credit history and rating, you can tell when something is amiss and quickly take action to address it.
You’re entitled to receive a free credit report from each of the three credit bureaus each year. A good way to do this is to stagger your inquiries evenly through the year, so that you’re receiving a credit report about once every four months.
If you find errors in your credit report, these are now easier to get fixed. Under a 2015 settlement, you can now work with a specially trained employee at each of the credit bureaus to investigate and fix errors in your credit history.
Your credit rating is determined largely by how much debt you have and how you manage that debt. The act of retiring, and the fact that you’re no longer receiving a full-time paycheck do not appear anywhere in your credit record. What matters is that you keep debt under control and make payments on time. The age of your credit history is also a factor. Most retirees have long credit histories, and this is reflected in their credit scores.
Some retirees go overboard on lifestyle purchases like luxury cars, second homes, or yachts, and without a steady paycheck to help meet the recurring costs, their credit rating can suffer.
If you’re concerned about maintaining or improving your credit rating in retirement, here are some things you can do.
1. Keep making your debt payments on time, or even better, eliminate your debts as soon as possible. In retirement it’s particularly important to rein in your debts and spending, since you no longer have the cushion of a paycheck and many retirees don’t have pensions. If you have a large amount of credit card debt compared to your credit limits, then your score will be adversely affected. A good practice is to keep recurring balances below around 25 percent of your credit limits.
If you have outstanding balances, try to pay them down or settle them. Dummies.com has a primer about negotiating your debt.
2. Keep credit card accounts open, even if you’re not using them. Cut up your old cards but leave the accounts open. Closing credit card accounts reduces your amount of available credit, which lowers your credit score.
3. Don’t apply for too many new accounts. Each time a lender or business retrieves your credit rating, it can lower your credit score a bit.
4. Keep using your existing cards for routine expenses. Doing this keeps your credit history current. If you stop using credit cards altogether, you may not have enough of a credit history for lenders to look at if you should apply for a loan later.
5. Increase your credit limit on existing cards. This decreases your debt-to-available credit ratio, which benefits your credit rating.
6. Fix any errors in your credit record. A settlement in 2015 with the three credit bureaus will make it easier to get errors examined.
See this video for tips about maintaining your credit rating.