I’m a Certified Financial Planner: What To Do If Your Credit Score Drops in Retirement
Imagine sipping piña coladas on a tropical beach or crossing off bucket list adventures on your retirement itinerary, only to receive a notification from your credit monitoring app informing you that your credit score has plummeted. It’s not the kind of message anyone wants to receive, but it’s a reality that some retirees face.
Can Retirement Affect Your Credit Score?
It depends. “Generally, credit scores can see a slight dip after retirement, usually within the range of 20 to 50 points. However, retirement itself doesn’t cause a decrease, so they’re very much avoidable. It’s the changes in financial behavior that often come with retirement that trigger credit score drops,” said Andrew Latham, certified financial planner and the managing editor of SuperMoney.com. So, while credit scores could decline in retirement, the two have no direct correlation. Some retirees may experience no credit score change, while others may experience a decrease. Ultimately, it all depends on individual financial habits.
Why Credit Scores Tend To Decline in Retirement
After years of hard work, many retirees look forward to enjoying their golden years. However, it’s not uncommon for their credit scores to drop after leaving their 9-to-5 jobs behind. Here are some possible reasons for the credit score dings, according to financial planners who have seen this happen to some of their clients.
Decreased Borrowing Activity
“Once you retire, you often have fewer reasons to borrow, whether for a home, car, or other significant expenses. And since credit scores thrive on active and responsible borrowing, less activity can lead to a small decline,” Latham said. While fewer borrowing activities can lower your debt obligations, it could negatively affect your credit scores since the less you borrow, the less data is available to credit agencies to assess your creditworthiness.
Income Changes
As you transition into your retiree lifestyle, the shift from a regular paycheck to retirement income (like pensions, Social Security or withdrawals from retirement accounts) could often make it more difficult to manage debts or even qualify for new credit. “Creditors look at income, among other factors, when extending credit, so a change in financial dynamics can indirectly influence credit scores,” Latham said. In other words, while your income doesn’t directly impact your credit score, how much money you make affects your ability to pay off debt, which in turn affects your FICO score.
Multiple Credit Inquiries
Many retirees may not be aware that taking out multiple loans or financing options could still negatively impact their credit scores. As Kendall Meade, a certified financial planner at SoFi, highlights, new loans such as mortgages, home repairs or financing furniture could result in hard inquiries on your credit report. “While one or two inquiries may not make a significant impact, multiple inquiries can cause credit scores to drop,” she said. If you’re considering taking out loans to renovate your home for aging-in-place or other purposes, know that these hard inquiries can stay on your credit report for up to two years and temporarily lower your credit score.
Closing of Old Accounts
“As you simplify your life – including your finances – in retirement, you may decide to close older or infrequently used credit accounts. However, doing so can reduce the overall credit history length, which plays a role in credit score calculations,” Latham said. According to Experian, one of the three major credit bureaus, the length or age of your credit history accounts for 15% of your credit score. So, as you pay off debts or close your credit card accounts to simplify your finances in retirement, it’s natural for your credit scores to drop a few points.
Tips on Keeping Your Credit Score High After Retirement
Saying goodbye to the daily grind doesn’t mean you should neglect your finances. Here are some tips to keep your credit score intact during your golden years.
Think Twice Before Closing Accounts
As mentioned earlier, closing your old accounts in retirement can often cause a noticeable drop in your credit score since it lowers the age of your credit history, which is one primary factor that affects your creditworthiness. “I recommend not closing any credit cards unless they are charging you an annual fee or you would be tempted to spend more than you can pay off in full each month. Even if you aren’t using these cards, keeping them open can help keep your credit higher,” Meade said.
Bunch Similar Inquiries Together
“If financing big purchases like a move, try to bunch similar inquiries together,” Meade said. According to TransUnion, one of the three major credit reporting agencies, VantageScore counts all inquiries made within a 14-day period as just one inquiry on your credit report if they’re all for one specific type of loan, like a mortgage or auto loan. The FICO scoring model also treats multiple inquiries in a similar way, but you’ll need to do it within 45 days for it to count as only one inquiry.
Monitor Your Credit Score
According to a study conducted by the Federal Trade Commission, 1 in 5 people have an error on at least one of their credit reports. Inaccuracies on your credit report can tank your credit score without you even knowing. That’s why it’s so important to stay up to date with your credit health. The federal Fair Credit Reporting Act (FCRA) gives you the right to request a full credit report from each bureau once every 12 months at AnnualCreditReport.com. Once you receive the copies of your credit reports, go through each of them thoroughly and immediately dispute any inaccuracies you find. Some of the most common errors to look for include incorrect balances, mixed credit files and wrong payment history.
Consider Your Overall Financial Picture
While keeping your FICO score high is important in retirement, make sure you’re making decisions that are in the best interest of your entire financial picture, not just your credit score. “For example, while paying off your mortgage and car loans may cause a dip in your credit, it could make budgeting in retirement much easier. So unless you’re planning a big purchase that will require credit in the short term, you may not need to worry about your credit at this point,” Meade said. And before making any hasty decisions regarding your finances during your golden years, it may be helpful to seek personalized advice from a financial expert who can help you map out the best course of action.
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