Your Credit Score and Retirement: What You Need to Know
If you’ve reached a stage where you’re thinking about retirement, finances are probably something you’ve given a lot of thought to. However, when doing the financial planning needed for retirement, people often forget to take a look at one important thing — their credit score.
It’s in your best interest to ensure your credit is strong before retirement, not to mention keeping it that way once you’ve retired. Your credit score affects things like your ability to borrow and the interest rates you’ll be offered. If your score is less than ideal, it signals to lenders you may not be a good risk — especially if you aren’t working and can’t provide proof of income for repayment.
Let’s take a look at how you can build and maintain a good credit score as a future or current retiree.
Does Retirement Impact Your Credit Score?
While retiring doesn’t automatically affect your overall credit score, how you manage your money once retired can. It can also affect your ability to borrow, so having a solid plan for your finances in retirement is a must.
Credit reports don’t specifically include current employment information, but they do track and monitor your history of borrowing and repayment with mortgages, car loans, lines of credit, and credit cards, all of which are included in your score calculation. Anything that has been active in the last decade will show on your credit report, and that includes items that are fully paid off or accounts closed for non-payment.
As a retiree, where your credit score has the most impact is when lenders are making decisions about whether you can borrow. They’ll want to see a current source of income, but they’ll also consider your history of repayment when assessing the risk level.
The good news is that the length of your credit history is always a factor, so being near retirement age bodes well in terms of your ability to have established a lengthy history.
Improving Your Credit Score
The best time to work on improving your credit score is before you actually retire. That starts with making sure your bills are paid on time, every time. Even if you can’t pay the bill in full, making the minimum payment is critical.
To fully get a handle on your credit, you’ll want to pull a credit report and find out what your score is. After you have the report, the first thing you should do is review it for any inaccuracies. Sometimes accounts get misreported or your information might get mixed up with another person’s, and these can impact your overall credit score. It’s also a good way to keep an eye out for credit fraud, which can also negatively affect your score. If you find anything that needs to be corrected, you can contact the credit agencies to dispute it and have it fixed.
Credit cards are another tool that, if managed properly, can help you make gains with your credit score. Using all of your available credit can be a sign to potential lenders that you have cash flow problems. If you’re at or close to your available credit limit, prioritizing paying down the balances will help your score go up. You should also avoid opening or applying for too many cards as this can be considered credit-seeking behavior, which is another red flag for lenders.
If you have any accounts or loans that are delinquent or even written off as a bad debt, working to pay these off will help your credit score. While it won’t remove any missed payments, it does show that you are clearing the debts, which lenders consider a positive.
Remember, the higher your score, the more likely it is you’ll get a favorable interest rate when you borrow. A lower interest rate will save you money in the long run, so taking steps to improve your credit score can pay off in multiple ways.
Maintaining a Good Credit Score
Consistently paying your bills doesn’t just improve your credit score, it also helps you maintain it. Your payment history makes up roughly 35% of your total credit score, so missing a couple of payments can impact your credit more than you think. An easy way to be sure everything is paid on time each month is to set up automatic payments for any bills you can.
When it comes to your credit score, history matters, so if you’re considering credit card accounts, take a look at which one has been open the longest. 15% of your credit score is based on history, so even if you aren’t using the card, it’s always best to keep one with a longer history open and close one you’ve had for less time.
Your credit utilization rate (CUR) also impacts your overall credit score. The CUR is the ratio of debt to credit available and is calculated by a percentage. So it’s not just about actual dollars, but how much you have at your disposal, versus how much you’re actually using. A CUR ratio of 30% or less is considered the most desirable.
Finally, a big part of building and maintaining your credit score is actually using it. Inactive cards can eventually be closed, so you should be periodically making purchases with your card. You don’t need to carry a balance month to month — simply use your credit card for regular purchases and then pay them off right away. The bonus of doing this is that you may earn bonus points or rewards, so by using your card to purchase things you’d be buying no matter what, you’re not only maintaining good credit, you’re also earning additional bonuses at the same time.
Monitoring Your Credit Score
Keeping an eye on your credit report is something everyone should do. Mistakes happen, and the credit bureaus are simply the go-between with you and your lender.
There are three main credit reporting agencies within the US — Equifax, Experian, and TransUnion. Each one reports independently, so if you intend to check your credit all three should be reviewed. You can’t assume that just because things look fine with one that they’re fine with the others.
Identify theft is also a growing concern, and should someone open credit cards or take out a loan in your name, you may not actually know until seeing it on a credit report.
As your credit score impacts your ability to borrow, it’s important that you monitor it regularly and take action to correct any discrepancies you may find.
You can request a copy of your credit report directly from the agencies, or through a free service. If this is something you’d rather outsource, there are several paid service providers who will do credit monitoring for you.
Retire with a Good Credit Score
When looking at your credit report to see how you’re faring, consider this: the average credit score in the United States is currently 711. (1)
Depending on where you fall in relation to the average, that should at least give you a starting idea of how much your score may need to improve. Armed with the right steps and a plan, you can ensure your credit score is exactly where you want it to be for retirement.
John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.