When you were younger, applying for your first credit card, you probably recall the paradox you faced. Before a bank would issue you a card, it wanted to see your credit history, which left you wondering, “How could you have a history, if you didn’t have a card?”
Your chicken and egg situation hardly seemed fair, but somehow, you got that first card and were well on your way to building your credit.
Now flash forward to today. You’re retired and can look back on a long history of paying your bills and credit cards on time, leaving you with a stellar credit history. In fact, you might be living an all-cash lifestyle virtually debt-free. The house is paid off, the cars are paid off, and you have no balances on your credit cards. Indeed, you can’t even remember the last time you used a credit card.
But, believe it or not, a debt-free retirement could present a new paradox: If you stop using credit altogether, you may eventually have no usable credit history, leaving you to start building your credit history all over again.
For example, in 2016, FICO reported that 7 million Americans, median age 71, were “credit retired.” That’s FICO’s euphemism for being “unscorable,” because these seniors lacked any recently active or updated accounts and no payment blemishes.
Meanwhile, millions of other credit-light seniors may still be scorable, but their scores may not be as high as they envisioned because of their lack of credit use.
Consequences of a Reduced Credit Score in Retirement
At first, you might think a lower credit score in retirement doesn’t much matter, but that thinking could be foolhardy.
Even if you’re not contemplating taking out a home loan or an auto loan, your credit history (or lack of it) or a declining credit score could impact many other areas of your life that you haven’t fully considered.
For example, do you plan to do more traveling in retirement? To earn travel perks like free flights or hotel stays, you need a good credit card and that often requires a good credit score. Highly coveted cash-back cards can also help defray gas, car rental and RV rental costs.
Meanwhile, in a 2018 story by WalletHub, customers with excellent credit can save between 20 percent and 54 percent on their auto insurance.
Regarding retirement, what if you decide all that free time just isn’t all it’s cracked up to be and you want to return to the workaday world? Today, more and more employers are checking your credit score right along with your LinkedIn profile.
Or what if you decide that renting or downsizing to a smaller home would better suit your lifestyle? Chances are the landlord or a lender reviewing your application will take your credit score into account.
Good Credit News for Retirees
When you retire, your last employer doesn’t send the credit bureaus a big, bold postcard notifying them of your retirement. Hence, they have no way of knowing what your work or retirement status is.
Nor do the credit reporting agencies care how old you are.
Even your source of income doesn’t factor into your credit score. No one at the credit bureaus will ever be the wiser if you’ve substituted your regular paychecks with Social Security checks.
What the credit bureaus do care about, however, is that your income allows you to meet your monthly expenses. Income doesn’t have to be a salary. It could come from Social Security, a pension, 401(k), savings, rents, stocks, bonds and other investments. You can also include other household income your spouse or partner earns if he or she hasn’t retired or also is drawing down on Social Security or other retirement income.
Ideally in planning for retirement, you’ve been moving toward a reduction of your expenses relative to any reduction in your income.
So, maintaining a solid debt-to-income ratio, usually less than 36 percent, should be your first bulwark against a declining score. And this should be fairly manageable if you’ve been focused on reducing your debt to a level you comfortably live with for your retirement.
Whip Out the Plastic
It may seem counterintuitive to take on any debt, especially if you have the means to pay cash for whatever you need, but the rules in the credit world are such that having a credit history plays a large role in giving you a credit score.
But it’s not enough just to have a credit card. You actually have to use it. Non-use could cause the issuer to close the card for lack of activity or the card could simply not be included in computing your score. Whether the issuer closes your card or you end the use on your own, the decision could be damaging financially. That’s because the length of your credit history makes up about 15 percent of your overall credit score. A long history rewards you and the absence of a history penalizes you.
Even more important than having a credit card history is the quality of that history. Demonstrating good payment habits will keep your score up. A poor payment history will lower your score. At 35 percent, payment history is the biggest component in determining your credit score.
What Else You Can Do
Aside from keeping your accounts open, especially those showing a long history, and making your payments on time, there are other good practices you need to observe to maintain your good credit score.
Keep your balances low. A good credit limit, also referred to as a utilization rate, is less than 30 percent of your credit limit. If you have a credit card with a $1,000 limit, your balance should be less than $300. Paying off your balance each month is the best strategy of all, as you’ll maintain an excellent utilization rate (0 percent is best of all), and you’ll incur no interest charges.
Monitor your credit reports
Protect your credit score by frequently checking for reporting errors or identity theft. If left unchanged or uncontested, a negative item could stay on your report up to seven years.
You can access a free copy of your credit report from each of the three major credit bureaus once a year by visiting www.annualcreditreport.com.
Keeping Your Options
Maintaining good credit through your retirement is a smart retirement strategy. It will likely not only save you money and help you receive better deals and discounts in the long run, but it will give you more options for your retirement.
For example, you may have never anticipated taking out a reverse mortgage, but after hearing how one could help you better manage your investments or even help you pay for long-term care needs one day, you may now see its utility in helping you achieve a better retirement.
A reverse mortgage doesn’t require a certain credit score, but your lender will conduct a Financial Assessment as part of its due diligence, which includes a review of your credit history to help it determine your suitability for the loan.
Whatever decisions you make for your retirement, you want to give yourself the strongest financial hand possible, and the way you do that is by maintaining a strong credit profile.
Retire when ready, but keep your good credit working for you every day of the year.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice.