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As you begin to approach retirement you’re likely thinking more about wealth preservation than you are about credit scoring. Your borrowing days may be behind you. Even after retirement, however, your credit scores still matter for a variety of reasons, not the least being that your existing creditors will continue to check them from time to time.
Thankfully, the recipe for maintaining good credit scores is essentially the same whether you are a young adult or a retiree. If you’ve figured out how to achieve high credit scores prior to retirement, then the odds are pretty good that you can maintain pace well into your golden years.
There’s good news for those who have recently retired or are planning to say goodbye to the daily grind soon. The act of retirement has zero impact upon your credit. Your decision to retire does not show up on your credit report and, unless you choose to tell them, even your lenders are none the wiser. Because your decision is not “on record” anywhere with the credit bureaus, your scores are not affected either
How you manage your liabilities and how much debt you owe are the two primary factors that influence your credit scores. Keep making your payments on time after retiring and your scores will continue to benefit. Yet, if retirement leads to a lack of income and you start making late payments as a result, your scores will suffer.
Additionally, any time you carry a large amount of credit card debt relative to your credit limits, your scores will suffer (this credit card balance-to-limit relationship is known as your credit utilization ratio). But if you’ve prepared for retirement by paying off your credit cards, your scores will likely improve. When you pay down credit card debt at any age, you can almost certainly expect your credit scores and your finances to benefit.
Credit scores are based upon a variety of factors. However, credit scoring models like FICO and VantageScore don’t consider your age or your employment status. Even your income, or lack thereof, does not directly impact your credit scores. As such, the three biggest differences between a retiree and a younger person who’s still employed (i.e. age, employment status, and income) are meaningless to your credit scores.
And the news gets even better for retirees. Even though your age doesn’t affect your credit scores, the age of the accounts on your credit reports does have an impact. A lengthier credit history is better than a shorter one.
A meaningful percentage of the points awarded by both FICO and VantageScore credit scoring models are based upon the age of your credit history. It makes sense to assume that retirees will have older credit histories. So, retirees are more likely to have an upper hand in this credit scoring category. Older accounts on your credit reports can potentially give your credit scores a boost.
According to FICO, “In general, older consumers score higher than younger consumers.” Approximately 68% of consumers who are older than 60 have FICO scores above 700, with about half of them scoring over 800. Compare that to the 18–29 year old range where roughly 30% score above 700, and around 2% score above 800.
Even after you retire, it’s still very important to maintain good credit scores. Credit scores still have the ability to impact many areas of life after retirement, including your ability to refinance your mortgage if rates drop or secure a new home loan if you decide to downsize. Auto loan approvals, credit card approvals, and even your insurance premiums may be affected by your credit scores as well.
Closing credit card accounts can be a bad idea at any age. When you close a credit card account, it has the ability to increase your credit card debt-to-limit ratio (the relationship between your credit card balances and credit limits). If you close unused credit cards and your utilization ratio increases, your credit scores will almost certainly drop.
It is important to protect yourself from credit errors and identity theft, even in retirement. Credit report errors and identity theft both have the ability to drop your credit scores quickly. At minimum, you should stay in the habit of checking your three credit reports each year at www.annualcreditreport.com. It’s better to check your three reports monthly or at least quarterly. You can also freeze your three credit reports if you want to prevent fraudsters from opening unauthorized accounts in your name.
When you cosign for a friend or family member, you might help the person you love qualify for a loan or credit card that they would have trouble getting on their own. But this favor could turn into a very expensive one for you. Cosigning for a financial obligation makes you equally liable for the debt. It puts your credit scores and your money on the line if something goes wrong.
Instead of cosigning, you might consider helping out your loved ones by adding them as authorized users onto your existing credit card accounts. (It’s up to you whether you actually hand over the card to that family member or friend when it arrives in your mailbox.) By adding someone you care about as an authorized user, you can potentially help that person build better credit. As a result, your loved one may be more likely to qualify for new financing on his or her own.
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