Experts are warning about credit score pitfalls to avoid in retirement, which can have unexpected consequences even for those retirees with financial security.
Credit scores factor into a variety of insurance and heath-care decisions, impacting premiums and even affecting whether a person is accepted to an assisted-living facility, financial advisors told the Wall Street Journal on Tuesday.
While stopping working doesn’t directly impact your credit score, living off a fixed income, paying off old loans, and closing old credit card accounts can send scores lower, experts warn.
According to credit scoring company FICO, average scores rise as consumers get older, peaking at 762 when they are in their 70s, but then drop off slightly at age 79, to 756.
A credit score above 690 is still considered ‘good’ by most lenders and a small drop above that range shouldn’t hurt much — but those who fall below that threshold could face unexpected headaches.
Experts are warning about credit score pitfalls to avoid in retirement, which can have unexpected consequences even for those retirees with financial security
Many retirees who are financially secure, and have paid off any loans or mortgages, may feel that their credit score no longer matters.
A survey last year from TransUnion found that nearly half of American baby boomers believe their credit scores matter less after age 70.
But there there are several reasons they might want to maintain a solid credit record.
Crucially, some assisted living facilities require a pre-admission credit check, the way a landlord might run a credit check before renting an apartment.
As well, you’ll need good credit if you want to help a child or grandchild qualify for a loan or rent an apartment by co-signing with them.
And a loan such as a home equity line of credit can be used to finance repairs and upgrades that will make your home more accessible. For example, you might widen doorways to accommodate a wheelchair or walker.
The average 65-year-old today will live until his or her mid-80s, according to the Social Security Administration.
That’s why it’s important to maintain a strong credit profile even if you don’t foresee borrowing money again — unexpected circumstances could always arise.
Credit scores factor into a variety of insurance and heathcare decisions, and can impact premiums and even affect whether a person is accepted to an assisted-living facility
How to keep your credit score up in retirement
How FICO calculates credit scores
Here are the five variables used to calculate a FICO score and their relative weighting:
35% Payment History: Your track record of on-time payments, vs any late payments.
30% Credit Utilization Ratio: The percentage of your total credit limit utilized at any given time.
15% Length of Credit History: Your average account age, and oldest active account.
10% Credit Mix: Credit scorers like to see a mix of different types of loans.
10% Recent Inquiries and Newly Opened Accounts: A rush of credit checks and new accounts can negatively impact your score.
A key pitfall for many retirees is closing old credit card accounts that are no longer needed.
Because the age of your oldest active account is a key factor in credit scores, shuttering old accounts can ding your score.
As well, closing accounts impacts your debt-to-limit ratio, or the amount of your total credit limit that is utilized at any given time.
Credit utilization ratio is heavily weighted in FICO’s score model, accounting for 30 percent of a consumer’s score.
About one-third (34 percent) of US baby boomers risk damaging their credit scores in retirement by reducing or eliminating their use of credit cards, according to a survey by TransUnion, one of the three major credit bureaus that gather information used to calculate the scores.
Using credit cards for small purchases keeps your credit active, ensuring you’ll have available credit – or good credit scores – when it counts.
Keeping credit cards active doesn’t mean running up debt, as long as you pay off your full statement balance each month. Think of them as tools for maintaining credit, not a temporary loan.
If you cease using your credit entirely, you may run the risk of having no credit score at all.
FICO considers credit files without any activity for six months to be ‘stale’ and does not issue a new score.
Common mistakes that can hurt your credit score
Some mistakes can be reversed quickly. Running up credit card bills can tank your credit score, for instance, because the portion of your credit limits you´re using is weighed heavily in credit scoring. But when you pay down the debt, the damage disappears as lower balances get reported to the three major credit bureaus, Equifax, Experian and TransUnion.
Mistakes that have long-running ripple effects hurt the most, says credit expert John Ulzheimer. A late payment, for example, can get sent to a collection agency, then perhaps grow into a repossession or bankruptcy.
Those batter your credit and stay on your credit record for years. Likewise, co-signing a loan for someone who is later unable to pay can hamstring your finances for a long time.
MISSING A PAYMENT: Paying just a day late might cost you a penalty fee, but your credit score won´t suffer because creditors can´t report your account as delinquent until it´s 30 days past due. If you have a high score, going 30 days late can knock as much as 100 points off your score – and it stays on your credit report for seven years. The damage gets worse if you let the account slide to 60 days past due, 90 days past due or more. Your score can recover, but it will take time. Catching up on that account, and keeping all other payments up to date and balances low, can help.
RAIDING RETIREMENT FUNDS TO PAY DEBT: Most people don´t want to file for bankruptcy. Almost half of Americans say they would not file no matter how much credit card debt they had, according to a recent study commissioned by NerdWallet. Bankruptcy attorney Roderick H. Martin of Marietta, Georgia, says some of his clients have tapped – or even emptied – retirement savings in a desperate attempt to stay afloat. That often just delays the inevitable – “then they turn around and file for bankruptcy,” he says. Retirement savings are typically protected in bankruptcy, but money already withdrawn cannot be recovered.
CO-SIGNING A LOAN: Aaron Smith, a financial planner in Glen Allen, Virginia, says co-signing so a friend or relative can get credit is often a mistake. “My personal and professional opinion is if they can´t get it on their own, there must be a problem,” he says. If the primary borrower doesn´t pay as agreed, it can leave both your relationship and your credit in tatters. Even if the borrower repays as agreed, remaining on the loan can limit your borrowing capacity. Before you co-sign, ask if you can be taken off the loan at some point.
SOMETIMES DOING NOTHING IS THE MISTAKE: We may think we´re too busy to trouble ourselves with fine print or financial chores. Either can come back to bite us.
NOT CHECKING YOUR CREDIT: “I think checking your credit is like going to your dentist for a cleaning,” says Elaine King, a certified financial planner and founder of the Family and Money Matters Institute. “You need to make a habit of doing it. If you wait too long, there can be some rotten stuff there.” A credit report isn´t exciting reading; it´s a summary of your past handling of credit. But “boring” is what you want – anything you didn´t expect to see is worth investigating in case it´s an error or a sign of fraud. Through April 2021, you can get a free credit report weekly from the three major credit bureaus by using AnnualCreditReport.com. Plan to check at least annually, and more often is better.
IGNORING THE DETAILS: Not knowing your credit cards’ interest rates or when a 0% interest rate ends can cost you. Knowing interest rates can tell you which card to use when you´re paying for a new transmission and need to carry that balance for a while, for instance. Knowing when a teaser rate ends can help you ensure you´ve paid off the balance by then. It´s important to read the fine print. Some cards – primarily store cards – charge deferred interest if there is still a balance at the end of the introductory period. That means the “savings” from the teaser rate are added to your balance, wiping out any benefit.
