Maintain Your Credit Score for Retirement
You want to aim for good credit at all stages of life, but some people forget to consider how important credit is when you reach retirement. When you retire, you want to have as much financial freedom as possible to live out the rest of your years in peace. Unfortunately, bad credit can get in the way if you’re not careful.
Why It’s Important to Have Good Credit in Retirement
You May Need to Take out a Loan
Retirement comes with many expenses, some of which can be unexpected. If you’re in a financial bind and don’t want to dip into your savings or simply don’t have the funds, you might need to take out a loan.
Poor credit will cause your loan interest rates to skyrocket, which means more money is taken out of your pocket. Or even worse, you may find you don’t qualify for a loan when you desperately need an influx of cash.
You Could Want New Housing
Many retirees opt to move in their retirement, whether to find warmer weather or be closer to family. If you don’t have the money to purchase the housing you want, you’ll likely have to turn to renting or take out a mortgage.
Good credit in these situations will give you competitive rates. Conversely, moving locations will take a big chunk of your retirement income if you don’t have a decent credit score. For example, let’s look at two people applying for a mortgage with the same qualifications except for their credit scores.
Person A has a credit score in the 680-699 range—a “good” credit score. Person B has a credit score in the 760-850 range—an “excellent” credit score. According to Forbes, this difference in credit score will likely result in Person A having a mortgage interest rate that’s 0.399% higher.
So, why does such a small difference matter? Well, over a 20-year mortgage term, Person A will pay over $20,000 more in interest on a mortgage of $244,000 compared to Person B.
Simply put, having a poor credit score costs you money.
You Might Need Help Paying for Medical Bills
A retired couple aged 65 will need around $315,000 for medical expenses in retirement. If you have extensive medical needs, your medical bills could be even higher. Retirement typically means more medical attention, whether that’s attending regular doctor checkups, purchasing medical alert systems or other medical equipment or paying for health insurance expenses.
Covering your medical bills and expenses in retirement may mean you need to apply for a new credit card, put the bills on a current card or even take out a personal loan. Any of these options will save you money in interest rates if you have a better credit score. Also, if you don’t have the funds to pay your medical bills, that medical debt may impact your credit score and negatively affect you in the future.
Traveling Isn’t Cheap
For many retirees, traveling is one of their top priorities. No more work deadlines or worries of waiting for paid time off. The tricky thing about traveling, however, is that it’s costly. A common way to save money when traveling is to have good credit cards specializing in travel rewards, resulting in free flight miles, discounts on hotels, car rental coupons, etc.
A good travel credit card with competitive rates is hard to come by if you have a poor credit score. There are options, but the rates will likely be much higher, which can take a toll on your retirement income.
How to Maintain and Improve Your Credit Score Before and After Retirement in 6 Steps
1. Pay Off Debt
Retiring isn’t going to be easy if you have a great deal of debt trailing behind you. Make it a priority to pay off as much debt as possible before you retire, whether it’s credit card debt or past-due bills. This will improve your credit score immensely and help you enter retirement worry-free.
2. Don’t Close Your Credit Card Accounts
You may be in a hurry to close your credit card accounts because you want to go into retirement debt-free. Although it’s a good move to have no credit card debt, you still want to keep your accounts open. Closing your accounts will affect your credit history, which makes up 15% of your credit score. Keep your accounts open if you want to continue to improve your credit history and score.
However, if you’re trying to live a frugal retirement, be careful not to accrue too much debt with your open credit cards. Consider setting limits for yourself or even leaving your credit cards at home to avoid overspending.
3. Open Additional Accounts if Necessary
If you don’t have a lot of credit or need help improving your current score, opening additional accounts may be a good idea. However, continue to use your accounts wisely and check your credit utilization ratio often to ensure you’re not hindering your credit score progress. Ideally, you want your credit utilization ratio to be less than 30%.
4. Consolidate Your Debt
Keep in mind that debt consolidation won’t be the best option for everyone. However, there are many cases where it will simplify your debt, lower your interest rates and save you money each month. Consider debt consolidation, and consult a professional if you think this might be the right thing to do to prepare for retirement.
5. Pay Your Bills on Time
Paying your bills on time is always important, but especially before and after retirement. At this age, you don’t have as much time to make up for a poor credit score, so make it a priority to pay your bills on time.
Just a 30-day payment delinquency could result in a 17- to 133-point credit score drop. This could significantly affect your financial situation in retirement, and you don’t want to create bumps in the road for yourself.
6. Frequently Check Your Credit Reports
Many websites allow you to check your credit for free. You can see where you currently stand, what’s impacting your credit score and how to improve it. You can’t manage or keep track of your credit if you’re not checking it often, so don’t forget to make that a priority.
A Comfortable Retirement Is Possible
Are you motivated to improve your credit for retirement but need help figuring out where to start? Credit.com offers resources for mastering your credit and finances, including a free credit score check, a credit report card and credit builder tools. Sign up now to get started. Your future retired self will thank you for taking these steps now.