Why you need good credit in retirement
By Kristin McGrath | July 6, 2015
For young people, credit goals are clear: Get a card and build credit so you can get good terms on life’s milestones – like car loans and mortgages.
If you’re a retiree, though, the road ahead is less defined, especially if the house and car are paid off, you’re downsizing and there’s no need to acquire more credit.
However, there are plenty of reasons to maintain good credit in retirement. And, luckily, if you’ve already built up good credit, there’s not much work involved in preserving it.
Reasons retirees need good credit
“Some approaching retirement or who are in retirement could think that a credit score is not as important as it used to be,” says Rosa Maymi, interim manager of education and outreach and financial security for AARP. “However, a good credit score can help retirees in a few areas.”
Those areas include:
1. Your second career: Some like to call retirement their “second act,” says Carly Laubenstein, marketing supervisor for American Consumer Credit Counseling.
“Instead of not working, retirement means finally doing what they love,” Laubenstein says.
If that second act means launching a business (as more and more retirees are, according to Maymi), you’ll need funds to get it off the ground. And you can expect lenders to check your personal credit.
“As retirees try to secure funds to get a small business up and running, keeping a good personal credit record can be helpful in qualifying for business start-up loans and helping to fund a second career,” Maymi says.
2. Saving money: Good credit may help you refinance your mortgage when rates drop, Maymi points out. It can also help you snag a lower insurance premium, if you need to switch providers, Laubenstein says, because insurers check your credit when you apply — and someone with good credit is considered a lower risk.
3. Downsizing: Buying a smaller house now that you’re an empty-nester? You’ll need good credit to get the best rate on a new mortgage. Moving into an apartment? Many landlords check your credit.
4. Travel: Many retirees in good financial standing take the opportunity to travel, Laubenstein notes. There are plenty of travel rewards cards that will help you earn points to pay for those trips or reimburse you for some travel fees – but you usually need excellent credit to get approved for them.
“Those who maintain good credit scores have access to credit cards with the best rewards features, allowing the ability to travel and offsetting some costs of airfare, fees and other items,” Maymi says.
How to prevent your credit from deteriorating
Considering that good credit can make your life easier and less costly in retirement, you’ll want to put some work into preserving it. The good news is that it isn’t tough – just consider yourself to be in maintenance mode.
At a minimum, you want to make sure you stay on FICO’s radar, which requires the following:
At least one account that’s been open for at least six months
At least one undisputed account that’s been reported to the credit bureaus (ie, Experian, Equifax or TransUnion) in the past six months
No indication that you’re deceased on your credit reports
You obviously satisfy the third requirement. If you have some open credit accounts, the second two are probably covered as well, even if you don’t use those cards much. That’s because an open account available for use “is likely to be reported to the bureaus on a monthly basis, regardless of whether there is any activity on the account,” explains Christina Goethe, director of communications for FICO.
You might eventually become unscorable, however, if you let your accounts lie dormant so long that your issuer closes them -– or if you close them yourself in the name of downsizing. Accounts closed in good standing will fall off your reports in 10 years, and if paid-off mortgages and car loans have fallen off too, you could eventually become invisible to FICO and therefore not qualify for new credit.
“As folks get older, use of credit activity may decline and some make the mistake of closing old credit accounts simply because they aren’t using credit cards anymore,” Maymi says.
So consider keeping at least a few cards open and alive.
“You don’t have to do much to keep the account active,” Maymi says. “Just use your credit card from time to time. Buy a tank of gas or some groceries with your card occasionally, then pay off your card right away and in full, avoiding interest charges.”
Beyond having a credit pulse registered by FICO, you’ll want to make sure you have a good score (for all those reasons listed above).
That means paying on time every month and using no more than 30 percent of your available credit, as low credit utilization will boost your FICO score.
It also means keeping your credit safe from outside threats. Seniors are at risk for identity theft, Laubenstein says, as they may not be checking their transaction history regularly in online banking or pulling their credit reports every year. That gives ID thieves plenty of time to open accounts in their victim’s name tarnish his or her credit before the victim finally applies for credit and gets rejected.
“If a retiree doesn’t think their score matters at all, they might stop monitoring their credit history,” Laubenstein says. “And then they try to apply for something and find out too late. The less you know about your credit, the worse off you are.”