You work hard all your life to get to retirement and live a comfortable lifestyle in those golden years. When people plan for retirement, they often focus solely on the numbers. They think about how much their pension might be, how much they might have in savings, and what they need to survive. And these are all crucial factors to consider. However, a part of retirement financial planning is often forgotten: credit in retirement.
Don’t assume credit won’t impact you during your retirement.
Recently, Northwestern Mutual released survey results showing the average American thinks they need $1.46 million in savings to retire. Yet the average retirement plan balance for Americans of all ages is only $88,400.
So, there’s clearly a gap between what most people think they need and what they may have. And that’s where credit in retirement comes in. Unless you’re extremely financially over-prepared for those non-working years, there’s a good possibility you’ll need to tap into credit at some point.
Keeping your credit strong even when you retire ensures you’ll be able to get access to new loans or credit when you need them and that you’ll be approved at favorable rates. So, let’s take a look at how you can maintain healthy credit in your older years.
5 Ways to Keep Your Credit Strong in Retirement
Retirement in itself won’t impact your credit score. Instead, your credit score is made up of the same five factors, whether you’re working or retired: payment history, amounts owed, length of credit history, credit mix, and new credit.
How you interact with your credit will determine if your credit stays healthy or suffers in retirement. Here are the five healthy credit habits you can upkeep to ensure your credit remains strong in your senior years:
1. Make Payments on Time and in Full
Your payment history contributes the highest weight—35%, to be exact—to your overall credit score. Missing just a single payment can result in a dip in your credit score and a negative line item added to your report.
Seniors must be especially cautious about always making payments on time and in full. In addition to negatively impacting your credit, late or missed payments can result in fees and can even increase your interest rate.
Consider putting your payments on auto payment so you don’t have to worry about missing a payment again. We all forget things sometimes, but the frequency of these slip-ups increases with age. So, do yourself a favor and set up everything on autopilot so you don’t have to stress about remembering every bill’s due date.
Paying bills in full is also very important as it saves you from paying interest fees and reduces the risk of debts piling up. If you ever get to a month where you can’t pay your balance in full, it’s a good sign you need to re-evaluate your spending and budget tightly for the upcoming month. After all, accruing debt in the retirement years is never a financially responsible choice.
2. Avoid Opening Too Much New Credit Accounts Close Together
When someone applies for new credit, the lender must do a hard inquiry into your credit report. A hard inquiry might send your credit score down a couple of points, but within a few short months, it recovers right back to where it used to be.
But that isn’t the case if you apply for many new credit applications in a short period. Multiple hard inquiries into your credit can result in a drastic drop in your score. This is partially because it looks like you’re desperate for credit and can be a warning sign of financial struggles to lenders.
Avoiding this problem is simple:
- Generally speaking, never apply for a new credit or loan application more than once in six months.
- If you’re comparing lenders, only permit them to make soft inquiries, which don’t impact your credit. Once you’ve decided on a final lender, they can run a single hard inquiry.
Remember to stop and ask yourself why you’re taking out so much new credit in retirement. While occasionally needing credit is understandable, relying too heavily on credit when you’re no longer working can lead to excessive debt.
3. Keep a Credit Utilization Ratio Below 30%
Your credit utilization ratio is the amount of credit you have available versus how much you spend every month. Experts advise keeping your credit utilization below 30%—whether you’re retired or not.
So, if you have two credit cards with a credit spending limit of $500 each, you want to ensure you don’t spend more than $300 across both cards monthly.
A low credit utilization ratio proves to lenders you don’t need to max out your cards every month to live.
As a retiree, you may consider paying for more things in cash or by debit to keep credit utilization low and avoid becoming overly reliant on credit accounts.
4. Stay Credit Active
Life is all about balance. While we just warned you it’s not ideal to spend too much on credit in retirement, it’s also not a good idea to avoid credit altogether.
According to FICO, to maintain a credit score, you need to have at least one credit account with activity within the last six months. So, it’s essential to make at least an occasional purchase on credit to ensure you don’t lose your credit score entirely!
5. Don’t Close Your Accounts
As you retire and lower your spending, you might re-evaluate your credit needs and realize you don’t need quite so many accounts as you had before. But don’t close most of your accounts without understanding the impact it can have on your credit.
One of the factors that make up your credit score is your credit history length. Your active account with the longest history extends your overall credit age. And closing down your oldest account can reduce your overall credit history length and decrease your credit score.
If your oldest credit account is a line of credit or credit card you don’t use anymore, consider keeping it open and making a small transaction every four to six months. Plus, as a retiree, you may not want to close too many accounts. If you need credit in the future, securing an approval may be challenging because you have less income coming in.
6. Monitor Your Credit
Everyone is vulnerable to fraud, but scam artists especially target seniors and retirees at high rates. So, while monitoring your credit is a valuable habit for everyone, it can be vital for those in retirement.
Identity fraud can ruin your credit and make it difficult to secure financial help when you need it. The best thing you can do is to monitor your credit reports for suspicious activity regularly and address any issues right away. You can also watch your credit score. If it starts to dip even though you haven’t changed your spending, it could be a sign something is wrong.
The good news is monitoring your credit can help you catch fraudulent activity earlier, making it easier to stop and reverse the damage.
Credit Can Help at All Ages
No matter how well you prepare for your retirement, you cannot predict how often you’ll need to rely on credit. Keeping up a strong credit score can give you peace of mind that you’ll have options if you ever need them.
Treat your credit as you did before retirement. Let it be an essential part of your life that you prioritize for your overall financial comfort. And now you know just how to do that with five simple steps!
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