Among the many things to be considered when preparing for retirement is something most people don’t like to think about: credit. To help you get a better sense of everything you need to know about credit when it comes to retirement, I brought credit and debt expert Leslie Tayne on the Retire Right podcast. Leslie is an award-winning financial attorney, the author of Life & Debt, and is an expert in financial credit and debt. Leslie has over 20 years of experience in consumer and business financial debt solutions, and is the founder and managing director of Tayne Law Group P.C.
Read on to learn what you need to know about credit in retirement!
Does Retirement Impact Your Credit Score?
Being retired can impact your credit score because retirement typically brings a change in income. Your debt-to-income ratio can also change.
Some of the main reasons why it’s important to maintain a strong credit score in retirement are:
You might want to obtain different types of financial products in retirement that require credit
The risk of credit fraud increases as you get older
At Heller Wealth Management, the times we’ve seen credit scores present a challenge with retired clients is when they want to purchase a new home or get a mortgage. It’s not uncommon to buy a second home or downsize during retirement when needs are changing, and your credit score is important because it’s just one piece of the moving puzzle. That’s why it’s critical to make sure that you’re optimizing your credit score so when the underwriting departments review your files, they don’t see any potential risk in lending you money.
How to Maintain Good Credit Scores in Retirement
To enter retirement with your best foot forward, Leslie recommends that you take a snapshot of your finances and get ahold of your credit report before retiring — that way, you know who your creditors are, how much you’re paying out each month, and what your budget is like.
You’re entitled to get a free credit report each year. Leslie recommends going to a website like annualcreditreport.com or creditkarma.com to get a report, as these options do not require you to input a credit card to access your report.
What Debt Really Means
There’s often confusion, especially with high net worth clients, about what debt really means. People frequently associate the word “debt” with a negative connotation, but it doesn’t necessarily mean that you’re in debt if you have debt.
Everybody has some sort of debt. Whether you owe some money someplace like to the IRS or you have debt payments on your car or house, those are all debts. You can have credit cards and may spend on them and pay them off each month, but you’re still acquiring a debt. This all factors into what the credit scoring model picks up. If you’re paying everything off, your scoring is going to be higher. If you’re carrying balances, you can still have a high credit score even though you have balances.
Carrying debt is not necessarily a bad thing. However, going into retirement, it’s important to take a look at what your goals are. Are you going to sell your house and buy a new one? Are you going to need credit for anything? Are you going to co-sign loans for your children or grandchildren? Just because you’re in retirement doesn’t mean that you’re not spending money. Instead, it means you’re in a different position where lenders are looking at you with a different perspective.
Because of this, maintaining debt and having debt is fine as long as it corresponds with the management of your debt and your credit score shows that you are managing it.
How Often To Check Your Credit Score
Leslie recommends checking your credit score once a year. There are three different bureaus that report credit information: Experian, TransUnion, and Equifax. There are several scoring models for things like mortgages and cars, which is why you want to take a look at all three reports because each one will have a different score.
It’s also important to note that your score will fluctuate every month regardless of what you do. This has to do with part of the scoring model that has nothing to do with anything within your control. What is in your control is making sure that you check your score — especially since fraud is rampant these days with hackers who can access all your information online. The only way to know about any fraudulent activity is if you’re regularly checking your credit report.
Leslie also recommends having a trusted relative who can be there for you and can check in on your score if you should become incapacitated, disabled, ill, or unable to care for that aspect of your personal life. It’s important to have someone who can double-check on your behalf and who can place a freeze on your credit if needed.
Freezing your credit means that nobody can take out credit in your name. There are a number of reasons why people freeze their credit, and it’s often done for people who are going overseas or leaving the country for retirement or those with long-term illnesses. It’s an efficient tool to protect yourself financially and is an option that can be used temporarily and then lifted once it's not needed anymore.
Mistakes To Avoid During Retirement
Mistake #1: During retirement, you’re living on a fixed income. You may have plenty of money, but a common situation is one where adult children come to you because they’re struggling financially and you end up co-signing loans, allowing them to move back in, or lending them a large amount of money that will impact your cash flow. You may supplement this spending with credit cards, and then find yourself in a position where your credit starts to suffer because you’ve lent money that may never be repaid and you’re ultimately responsible for.
Mistake #2: Another big mistake is failing to budget properly and or to understand what your retirement needs will be. Retirement is a long period of time, and even within your personal finances, there are a lot of fluctuations that can happen over time. Being prepared to properly manage all the things that can come your way is important, especially as expenses start to increase. If not, credit cards and other types of credit like refinancing houses or taking a mortgage out on an already paid-off home can happen. That’s why we at Heller Wealth Management work to help prepare retirees to avoid this kind of mistake by preparing upfront.
Maximizing Credit Cards in Retirement
According to Leslie, there are a number of ways to use credit to your advantage in retirement, especially with credit cards.
Speak to your credit card companies about the lowest possible interest rate they’re offering
Maximize your points by using credit cards for large purchases like cars or college tuitions
Use apps to help you take advantage of your credit card benefits in retirement
Credit Card Mistakes in Retirement
Overusing your credit card and not getting paid back for it with benefits
Being unaware of the balances you carry or your spending
Not considering which card to put purchases on depending on interest rates and benefits