Five Important Reasons Your Credit Score Matters In Retirement

Ah, retirement! You’ll have time to travel, reconnect with old friends, try new hobbies, and more. If you have the money, that is. In 2018, Experian reported that people between the ages of 55 and 73 carried an average of $95,095 in debt. Debt itself isn’t the problem, but credit problems can limit your options during retirement.

Here are five ways a poor credit history can affect your retirement lifestyle:

1. You might apply for a job

In 1985, only 10% of people age 65 and over were working or looking for work. This year, 20% of people in the same age group were still in the labor force. Typically, Social Security replaces about half your pre-retirement income.  Although you can snag some great senior discounts, most basic expenses cost about the same pre and post-retirement.

What if you really need a job, but can’t get hired because of poor credit? About 1/3 of employers routinely check an applicant’s credit history before hiring, particularly if the position involves company finances.  Potential employers don’t see your actual credit score. They get a modified version of your credit report that includes the amount of available credit you’re using, late payments, bankruptcy, and the total amount of debt.

2. You need to get a home improvement loan

Almost three-quarters of senior Americans own their home, but, according to the Department of Housing and Urban Development, the nation’s housing stock isn’t prepared for an aging population:

Only 1 percent of the existing housing stock includes all of the following features: single-floor living, doorways and hallways that can accommodate a wheelchair, zero-step entrances, lever-style door and faucet handles, and electrical controls that be reached from a wheelchair.

90% of seniors want to age in place, but seniors often don’t plan for the costs involved.  While an important safety feature like a home medical alert system is usually very affordable, other safety modifications cost far more.

Consider this chart provided by RetirementLiving.com:

If you have to get a second mortgage or tap a line of credit to pay for this, bad credit can raise the cost of borrowing and increase the remodeling cost.

3. You want lower insurance rates

Most states allow insurance companies to consider an applicant’s credit score when they determine insurance rates. Few people realize that their credit score influences two other credit-based scores that affect insurance rates:

• Auto insurance credit score: This is supposed to predict your likelihood of filing an insurance claim. It’s not based solely on your credit score, but that number is a contributing factor. CreditKarma will provide you with your auto insurance score for free when you join.
• Homeowner’s insurance score: In general, every insurance company uses its own scoring system, so you’ll have to ask your company directly about your score.

According to ValuePenguin, these “credit-based insurance scores” are based on the following factors:

Factors that positively affect your credit-based insurance score

• Long credit history
• Several bank and credit accounts in good standing
• No late payments
• Low credit usage
  

Factors that negatively affect your credit-based insurance score

• Bank or credit accounts in collection
• Numerous past-due accounts
• High use of available credit
• Numerous recent applications for credit

4. You want to downsize and move to a new place

It may be difficult to get a new mortgage or even move into rental housing if you have poor credit. If you do find new housing, be prepared to pay more.

• Higher interest rates: The average credit score is 675, but that’s not enough to qualify you for the lowest mortgage rates. The higher interest rates associated with lower credit scores may increase your monthly payment by several hundred dollars a month.
• Higher rental costs: In a 2014 survey, 48% of landlords said credit history is one the top three factors in deciding whether to rent to a prospective tenant. Owners who will accept tenants with low credit scores often require bigger security deposits, rent paid in advance, or automatic payments.

5. You have to use credit cards or loans to cover everyday expenses

Average credit card rates range from 14% to 19%, so missing payments can cost you quite a bit. Miss a single monthly payment, and it stays on your credit report for years. Miss two payments and your credit card issuer may raise your rate. Some companies hit customers with a “penalty APR” that can be as high as 29.99%!

Unfortunately, many people retire with far less in savings than they need to maintain their standard of living. Although Social Security is indexed to consumer inflation calculations, medical costs are rising far faster than the cost of washing machines and electronics. The average senior spends $4,300 in out-of-pocket medical expenses each year.

No wonder many seniors are squeezed:

“It’s not uncommon for people to get in over their heads,” says Bruce McClary, vice president for communications at the National Foundation for Credit Counseling. “But it’s harder for seniors. They can’t generate income from other sources to pay it off.”

People of all ages use credit as a short-term solution to a cash flow problem. However, paying off debt is harder when you’re stuck with a high interest rate.

Protect Your Credit, Protect Your Lifestyle

Finally, be prepared.  Your excellent credit score may fall a bit in retirement, even with a perfect payment history. That’s because your income will probably fall as you move from regular paychecks to collecting Social Security and drawing on retirement savings.

Keep making payments on time and keep your accounts active.  An “active” card, meaning one that you use at least once a month, will boost your score more than an “inactive” one.  Consider setting up small automatic payments for expenses like your phone bill, magazine subscriptions, or donations through your credit cards. That activity, coupled with on-time payments will help keep credit available and affordable when you need it.

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