Social Security: Will Poor Credit Hurt Your Benefits?

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If you’re like most Americans, you’re probably looking forward to a life of guaranteed income from Social Security after you retire. Every year, the Social Security Administration updates the estimated benefits you will receive so that by the time you retire, you can have a pretty good idea of just how much you’ll be getting.

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But in some rare circumstances, your poor credit can impact the amount that you actually receive in your checking account – and in truly unfortunate cases, you may lose some of your payment even after you receive it. For most Americans, this isn’t a concern, but if you’ve got bad credit or outstanding debts, you should work to rectify that before you face a surprising reality after retirement.

The Good News: There Is (Generally) No Impact

Let’s start with the good news – in the vast majority of cases, your Social Security is considered a federal payment that is protected from creditors. Even if you have $100,000 in credit card debt, as long as you are making at least the minimum payments, you won’t have to worry about anyone coming after your federal payments. In fact, even if you were to default on your credit card debt, in most cases, your creditors still couldn’t pursue your Social Security. There are, however, certain cases in which even your Social Security may be attached.

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The Bad News: Certain Unpaid Debts Can Result in Garnishment

The U.S. government generally considers federal payments untouchable from creditors – unless the government itself is the creditor. If you owe back taxes or otherwise owe the federal government money, it may step in and garnish as much as 15% of your Social Security payments. The same applies if you default on a federal student loan. Court-ordered alimony or child support payments may garnish as much as 50% to 65% of your Social Security payments.

Generally speaking, other creditors, such as collections agencies, don’t have the right to take your Social Security payments. But there are some tricky legal exceptions that may expose your payments to garnishment. For example, if you transfer your Social Security money to a separate bank account or don’t spend it within two months of receipt, that money can sometimes be fair game for creditors with a court judgment for garnishment. As this area can get confusing legally in a hurry, it’s best to consult with an attorney if you find yourself in this situation.

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Does Your Credit Score Impact the Amount That You Receive From Social Security?

Your credit score has no direct bearing on the amount of money that you receive from Social Security. The calculation for your Social Security payments depends on two factors: the amount that you earn over your lifetime and the age at which you file for benefits. Whether your credit score is 540 or 850, it won’t have any bearing on the calculation of your Social Security benefit. Of course, that being said, it’s more likely that you will have a low credit score if you’re in a low-paying job, as it can be harder to pay off your debts; and if you’re in a low-paying job, you’ll generate a smaller Social Security benefit as well. So, while there is no direct relationship between your credit score and your Social Security benefit, there is often a correlation between the two.

The Bottom Line

A bad credit score isn’t something you have to worry about when it comes to receiving your Social Security payments. But bad financial behaviors – such as falling behind on your taxes, alimony, child support, student loans or even consumer credit – may result in your Social Security being garnished. There is also a clear correlation between lower credit scores and lower income. If you’re earning a lower income, it means your Social Security benefit will also be lower as well. Thus, while your credit won’t directly impact your Social Security payments, there is this indirect connection. If you’re struggling to make ends meet, it’s a good idea to discuss your options with your creditors and/or a financial counselor before you create a long-term problem. 

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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