Experts warn of credit score pitfalls to avoid in retirement, which can have unintended consequences even for financially secure retirees.
Credit scores are a factor in a variety of insurance and health care decisions, affecting premiums and even affecting whether a person is accepted into an assisted living facility, financial advisers told the Wall Street Journal on Tuesday.
While stopping work doesn’t directly affect your credit score, living on a fixed income, paying off old loans and closing old credit card accounts can cause scores to drop, experts warn.
According to credit scoring company FICO, median scores increase as consumers age, peaking at 762 when they’re 70, but then dip slightly at age 79, to 756.
Most lenders still consider a credit score above 690 “good” and a small dip above that range shouldn’t hurt much, but those who fall below that threshold could face unexpected headaches.
Experts warn of credit score pitfalls to avoid in retirement, which can have unintended consequences even for financially secure retirees.
Many retirees who are financially secure and have paid off loans or mortgages may feel that their credit score no longer matters.
A survey last year by TransUnion found that nearly half of America’s baby boomers believe their credit scores matter less after age 70.
But there are a number of reasons why you might want to maintain a strong credit history.
Crucially, some assisted living facilities require a credit check prior to admission, in the same way that a landlord might run a credit check before renting an apartment.
Plus, 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 like a home equity line of credit can be used to finance repairs and improvements that will make your home more affordable. For example, you can widen the doors to accommodate a wheelchair or walker.
The average 65-year-old today will live into their 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 anticipate borrowing money again; Unexpected circumstances can always arise.
Credit scores are a factor in a variety of health care and insurance decisions, and can affect premiums and even affect whether a person is accepted into an assisted living facility.
How to keep your credit score high 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 history of paying on time, versus late payments.
30% Credit Utilization Ratio: The percentage of your total credit limit used at any given time.
15% Length of credit history: The average age of your account and the 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 spate of credit checks and new accounts can negatively affect 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, closing old accounts can affect your score.
In addition, closing accounts affects your debt-to-limit ratio, or the amount of your total credit limit that is used at any given time.
The credit utilization ratio is heavily weighted in the FICO scoring model and accounts for 30 percent of a consumer’s score.
About a third (34 percent) of U.S. baby boomers risk hurting their credit scores in retirement by reducing or eliminating their use of credit cards, according to a survey by TransUnion, one of three major credit bureaus that collect information used to calculate scores.
Using credit cards for small purchases keeps your credit active, ensuring You will have available credit, or good credit scores, when needed.
Keeping credit cards active does not mean accumulating debt, as long as you pay the balance of your account statement in full each month. Think of them as credit maintenance tools, not a temporary loan.
If you stop using your credit altogether, you may be at risk of not having a credit score at all.
FICO considers credit files with no activity for six months to be ‘stale’ and does not issue a new score.
Common mistakes that can hurt your credit score
Some errors can be quickly reversed. Rising credit card bills can affect your credit score, for example, because the part of your credit limits you’re using weighs heavily on your credit score. But when you pay off the debt, the damage wears off as lower balances are reported to the three major credit bureaus, Equifax, Experian, and TransUnion.
Mistakes that have a long-term ripple effect hurt the most, says credit expert John Ulzheimer. A late payment, for example, may be sent to a collection agency, and then perhaps turn into a repossession or bankruptcy.
Those hurt your credit and stay on your credit file for years. Similarly, co-signing a loan for someone who later can’t pay can hamper your finances for a long time.
MISSING A PAYMENT: Paying just one day late can cost you a fine, but your credit score won’t be affected because creditors can’t report your account as delinquent until you’re 30 days past due. If you have a high score, being 30 days late can subtract up to 100 points, 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 current and balances low can help.
RAIDING RETIREMENT FUNDS TO PAY DEBT: Most people do not want to file for bankruptcy. Nearly half of Americans say they wouldn’t file a return no matter how much credit card debt they had, according to a recent study commissioned by NerdWallet. Marietta, Georgia, bankruptcy attorney Roderick H. Martin says some of his clients have tapped, or even drained, retirement savings in a desperate attempt to stay afloat. That often just delays the inevitable: “then they turn around and declare bankruptcy,” he says. Retirement savings are often protected in the event of bankruptcy, but money already withdrawn cannot be recovered.
CO-SIGNER OF 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 that if they can’t get it themselves, there must be a problem,” he says. If the primary borrower doesn’t pay as agreed, it can ruin both your relationship and your credit. Even if the borrower pays as agreed, staying on the loan may limit the borrower’s ability to borrow. Before you co-sign, ask if the loan can be withdrawn at some point.
SOMETIMES DOING NOTHING IS THE MISTAKE: We may think that we are too busy to worry about the fine print or financial tasks. Either of them can come back to bite us.
DO NOT CHECK YOUR CREDIT: “I think checking your credit is like going to the dentist for a cleaning,” says Elaine King, certified financial planner and founder of the Family and Money Matters Institute. “You have to get in the habit of doing it. If you wait too long, there may be rotten stuff in there.” A credit report is not exciting reading; it is a summary of your past credit management. But “boring” is what you want – anything you didn’t expect to see is worth investigating in case it’s a mistake or a sign of fraud. Through April 2021, you can get one free credit report weekly from the three major credit bureaus using AnnualCreditReport.com. Plan to check at least once a year, and more often is better.
IGNORING THE DETAILS: Not knowing your credit card 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 transfer and need to carry that balance for a while, for example. Knowing when a teaser rate ends can help you ensure you’ve paid off the balance by then. It is important to read the fine print. Some cards, mainly 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, removing any benefits.
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