Having good credit is something you want to aim for at all stages of life, but what some people don’t think about is how important credit is when you reach retirement. When you retire, you want to have as much financial freedom as you can so you can live out the rest of your years in financial peace. Unfortunately, bad credit can get in the way of that if you’re not careful.
Why It’s Important to Have Good Credit in Retirement
You May Need to Take out a Loan
Retirement comes with a lot of expenses, some of which can be unexpected. If you’re in a financial bind and don’t want to dip into your savings, or if you simply don’t have the funds, you might need to take out a loan.
Having poor credit will cause your loan interest rates to skyrocket, and this is more money taken from out of your pocket.
You Could Want New Housing
Many retirees opt to move housing in their retirement, whether that be to find warmer weather, be closer to family, or other miscellaneous reasons. If you don’t have the money to purchase the housing you want, you’ll likely have to turn to renting or take out a mortgage.
Good credit in these situations will give you competitive rates, so if you don’t have a decent credit score, moving locations will take a big chunk of your retirement income. For example, according to Money Under 30, a 625 credit score in comparison to a 750 score could add half a percent to your mortgage rate.
You Might Need Help Paying for Medical Bills
Investopedia notes that a retired couple aged 65 years old will need around $285,000 in medical expenses in retirement. Especially if you have extensive medical needs, your medical bills could start to pile up. Retirement typically means more medical attention, whether that’s attending regular doctor check-ups, purchasing medical alert systems or other medical equipment, paying for health insurance expenses, etc.
Covering your medical bills and expenses in retirement may mean you need to apply for a new credit card, put the bills on a current card, or even take out a personal loan. Any of these options will save you money in interest rates if you have a better credit score. Also, if you don’t have the funds to pay your medical bills, that medical debt can impact your credit score and negatively affect you in the future.
Traveling Isn’t Cheap
For many retirees, travelling is one of their top priorities. No more work deadlines or worries of waiting for paid time off. The tricky thing about traveling, however, is that it isn’t cheap. A common way to save money when traveling is having good credit cards that specialize in travel rewards, resulting in free flight miles, discounts on hotels, car rental coupons, etc.
A good travel credit card with competitive rates is hard to come by if you have a poor credit score. There are options, but the rates will likely be a lot higher, which will take a toll on your retirement income.
How to Maintain and Improve Your Credit Score Before and After Retirement
Pay Off Debt
Going into retirement isn’t going to be easy if you have a great deal of debt trailing behind you. Make it a priority to pay off as much debt as you can before you retire, whether it’s credit card debt, past-due bills, etc. This will improve your credit score immensely and will help you enter retirement worry-free.
Don’t Close Your Credit Card Accounts
You may be in a hurry to close your credit card accounts because you want to go into retirement debt-free. Although it’s a good move to have no credit card debt, you still want to keep your accounts open. Closing your accounts will affect your credit history, which makes up 15% of your credit score. Keep your accounts open if you want to continue to improve your credit history and score.
However, if you’re trying to live a frugal retirement, be careful not to accrue too much debt with your open credit cards. If you need to set limits for yourself or even leave your credit cards at home to avoid over spending, consider doing so.
Open Additional Accounts if Necessary
If you don’t have a lot of credit or if you need help improving your current score, it may be a good idea to open additional accounts. However, continue to use your accounts wisely and check your credit utilization ratio often to ensure you’re not hindering your credit score progress. Ideally, you want your credit utilization ratio to be less than 30 percent.
Consolidate Your Debt
Keep in mind that debt consolidation won’t be the best option for everyone. However, there are many cases where it would simplify your debt, lower your interest rates, and save you money each month. Consider debt consolidation and consult a professional if you think this might be the right thing to do to prepare for retirement.
Pay Your Bills on Time
Paying your bills on time is always important but especially before and after retirement. You don’t have as much time to make up for a poor credit score at this age, so make it a priority to pay your bills on time.
Just a 30-day payment delinquency could account for a 90- to 110-point credit score drop. This could significantly affect your financial situation in retirement and you don’t want to create bumps in the road for yourself.
Frequently Check Your Credit Reports
Many websites allow you to check your credit for free. You can see where you currently stand, what’s impacting your credit score, as well as how you can improve it. You can’t manage or keep track of your credit if you’re not checking it often, so don’t forget to make that a priority.