The ideal way to reach retirement age is debt-free, with no mortgage and a large nest egg saved up. In reality, most retirees carry some debt, don’t have nearly enough retirement savings, and risk having their credit scores dinged at an age when they can least afford it.
About seven in 10 retirees have non-mortgage debt and carry an average balance of nearly $20,000, according to the 2023 State of Retirement Finances report from Clever Real Estate. The average retiree has only $170,726 saved for retirement, less than one-third of the recommended $556,400 based on Fidelity guidelines.
Retiring doesn’t necessarily put your credit score at risk, but some factors could play a part in lowering your score. One of these is that you are now living on a fixed income, which leaves less wiggle room for financial hardships.
A lower credit score carries the same problems in retirement as it does at any time of life – you’ll find it harder to borrow money when needed. Even with extended credit, you’ll likely have to pay higher-than-average interest rates. You could sometimes have your Social Security payment garnished for outstanding debts.
Here’s a look at six ways retirement can tank your credit score.
- Closing credit cards: Retirees might think it’s a good idea to close credit cards and try to live solely on retirement savings and Social Security benefits, but this could be a mistake. The age of your oldest active credit card account is a key factor in your credit score, Newsful reported. Closing old accounts can lower your score.
- Running up your balances: With more free time, it can be tempting for new retirees to charge more than they should for travel, dining out and other discretionary items. Remember that running up your balances can skewer your debt-to-limit ratio, which hurts your credit score. The rule of thumb is to utilize less than 30% of the credit available to you, according to The Retirement Solution.
- Not using credit: Although you don’t want to charge too much on your credit cards, you don’t want to stop using them altogether, either. As Newsful noted, you might have no credit score if you stop using credit cards. FICO considers credit files that haven’t registered activity for six months inactive and don’t issue a new score.
- Missing payments: This problem doesn’t only apply to retirees – you should always pay your debts on time, no matter your age. But once you make a major life change and get out of old routines, it might be easier to miss payments than before. Every time you miss or make a payment late, your credit score gets dinged.
- Using retirement accounts to pay off major debts: Your 401(k), IRA and other retirement accounts are supposed to pay your bills and fund your lifestyle in retirement – not go toward major debts. If you empty your accounts to pay off major debts, you might be heading toward bankruptcy, ruining your credit score.
- Paying bills for others: Depending on when you retire, you might have adult children or grandchildren just reaching college age or starting in the working world. They might need financial assistance or cosigners for loans. Nobody would discourage you from helping out loved ones, but you need to make sure you can afford to help before putting your finances and credit at risk.
The best way to avoid credit problems in retirement is to take steps to prevent them from happening in the first place. Experts recommend monitoring your credit score to ensure everything is accurate and fixing any issues that might have contributed to a lower score. For example, if you have a high debt-to-limit ratio, aim to get that back down to 30% or lower.
Ensure you are current on all your credit cards and other debts, and make every attempt to pay off large debt items such as your mortgage, auto loans and college loans. If you still have many years to pay your mortgage, consider downsizing to a less expensive home.
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