Many people who retire may think that their credit score becomes less important. After all, the house and car may be paid off and there may be no more large bills on the horizon. Even so, maintaining a good credit score is important. You can keep your credit score strong, even with a reduced or fixed income, by handling your credit accounts carefully. Continue to monitor your credit reports annually to watch for identify theft and to ensure accuracy.
EditSteps
EditUsing Your Credit Accounts Wisely
- Pay your credit card bills on time. Whether your earnings decrease with retirement or not, you remain responsible for making your payments on time. The credit agencies, which include both the credit card companies and the credit score reporting agencies, are less concerned with your income than with your ability to make your payments. Making your payments on time is the key, regardless of your income level.[1]
- Keep the credit balance low compared to the credit limit. With decreased income in retirement, you may be tempted to use credit cards more. This is fine if you make your full payments each month. However, if you let the credit balance creep up, you will reduce your overall credit score. Carrying a minimal balance will not hurt you much. Credit agencies measure the ratio of your outstanding credit debt as compared to the amount of credit that you have available to you. Carrying a debt of $2,000 is less damaging if your total credit line is $25,000, for example, than if your credit line is only $5,000. Watch the balance and keep your ratio down as much as possible.[2]
- You should try to keep the ratio to 25% or less. Thus, a $2,000 debt with $25,000 available credit is only 8%, which is strong, but $2,000 debt with only a $5,000 limit is a ratio of 40%, which is going to hurt your credit score.
- Keep credit accounts open. You may find that you need less credit as you enter retirement because you are buying less and your monthly expenses are lower. This may tempt you to close one or more credit card accounts that you might not be using. Don’t. Keeping established credit card accounts open serves two good purposes that will help your overall credit score.[3]
- First, your credit score is positively affected by the age on your accounts. An older account that you have had continuously for many years carries good, positive weight and helps boost your credit score.
- Second, keeping accounts open increases the amount of available credit that you have. As a result, the ratio of borrowing to credit is lower, and this helps increase your credit score. For example, if you owe $2,000 with total available credit of $20,000, the ratio is one-tenth. However, if you shut down an account, you may still owe the same $2,000 but only have available credit of $10,000. This ratio is one-fifth, and scores less for your credit report.
- Continue using your credit cards. Your credit score is affected not only by the credit that you have but also by your ongoing good use of credit. You should make a habit of using your credit cards at least for modest expenses each month. Then pay those bills on time and in full at the end of the month. This kind of practice will show that you can handle the credit cards and that you continue to be a good credit risk. The amount of your purchases is not as important as the fact that you continue using and paying off the credit cards.[4]
- Request credit limit increases. Periodically, you should ask your lender if you qualify for an increase in your credit limit. Especially if you have built up a good credit history by making payments on time, this request should be granted. You should continue to request this every few years, even as you enter retirement, if you believe you would qualify. The credit limit increase will help you keep a low debt to credit ratio and keep your credit score high.
EditManaging Your Credit Reports
- Check your credit reports annually. You are entitled to a free copy of your credit report each year from each of the three major credit reporting agencies. You should make a practice of requesting this report each year. Review it carefully and compare it with the report from the year before. If you notice that the score has decreased, you should try to identify the reason and make any necessary corrections.[5]
- You can reach the three reporting agencies to request your score and free report as follows:
- Alternatively, new companies like Creditkarma.com offer free checks of your credit score.
- Question any inaccuracies. When you review your credit report, you should look for any suspicious activity. If you see any reported accounts or purchases that you think are inaccurate, you should contact the reporting agency right away. Their websites contain multiple options for you to contact customer service, either by phone, mail or email.[8]
- When you call, you should have your copy of the credit report with you. Circle or highlight the questionable items you want to discuss. Keep a pad of paper with you and take notes of the phone call. Get the name and contact number of the person you speak with. Take careful notes of any recommendations or suggestions.
- Find out what the agency says it will do to investigate your concern. Ask how long it will take. Follow up again, by phone or in writing, if that time passes and you have not heard anything back from them.
- Avoid credit inquiries. Each time you apply for credit, the lender must check your credit report. Each check like that registers as a mark against your credit score. Obviously, if you need the credit and know what you are doing, then go ahead. But do not apply haphazardly for credit accounts, as too many inquiries can damage your overall credit score.[9]
- When you monitor your annual credit report, you should see a report of all credit inquiries. If you see inquiries that you do not recognize as requests that you initiated, you should ask the credit agency to investigate. If the inquiry cannot be verified as one that you initiated, you can have it removed to improve your credit score.
EditManaging Your Income and Expenses
- Work with a reliable financial advisor. A good financial advisor can help you manage your life’s savings to make the most use of your money in retirement. Ideally, you may have begun working with a financial planner long before retiring. If not, it is never too late to start. A good advisor can help you plan investments, set budgets, and use your money wisely.
- To find a good financial advisor, ask your friends or colleagues for recommendations. You may ask the manager of your own bank for referrals as well. (In many cases, your local bank may offer the services you need.) Meet with prospective advisors and ask some of the following questions:
- Do you specialize in retirement planning or management?
- How do you charge for your services?
- What is your investment strategy for someone in my position?
- How much communication can we expect with you?
- To find a good financial advisor, ask your friends or colleagues for recommendations. You may ask the manager of your own bank for referrals as well. (In many cases, your local bank may offer the services you need.) Meet with prospective advisors and ask some of the following questions:
- Set a budget for monthly expenses. Either on your own or with the help of a financial planner, it is important to know your financial situation from month to month. You need to set a budget that accounts for all your monthly expenses and identifies the sources of income. You may have finished paying the mortgage, but you might still have car payments. You certainly will need to make payments for utilities, food and other ongoing costs. Be thorough and list everything.[10]
- Compare your monthly expenses with whatever sources of income you can count on. Consider whether you will draw from a pension account, from savings, or from any other sources you may have available.
- Reduce your monthly expenses. Many people find that retirement means reduced income. In order to handle that and keep up a good credit score, you may find that you need to reduce your monthly expenses. Some of this may be easy, like cooking at home more often and reducing entertainment expenses. Some other reductions may be more challenging to accept but can have very meaningful and positive effects on your spending. For example, consider the following:[11]
- Cut back on an extra car. If you and your spouse have been using two cars, you may want to consider cutting back to one. This will reduce monthly insurance bills, gasoline costs, and excise taxes, not to mention car payments if you are still making them.
- Examine your insurance costs. Many retirees find that they may be carrying more insurance than they still need. For example, if your dependents are no longer relying on your income, you may be able to drop or reduce life insurance or disability insurance. You may also be able to reduce your car insurance by accepting higher deductible payments.
- Downsize your home. This may be an emotionally difficult decision if you have spent most of your life in one home. But if you no longer need the space because your children have grown and moved out, you can probably reduce property taxes, heating and utility costs, ongoing maintenance and care, and other expenses related to keeping up a big home.
- Reduce telephone costs. Many retirees find that they are keeping the telephone land line that has been in place forever, even though you may primarily be using a cell phone now. If you can drop the land line, you may save up to $50 each month in fees.
- Increase your income as needed. If you set your monthly budget, and you find that your retirement income is insufficient to meet your monthly needs, you may want to consider taking on some part time work. If you look around, there are many jobs that are well-suited to seniors with flexible hours and decent pay. Find something that fits your skill set. For example, AARP recommends the following as great part-time jobs for retirees:[12]
- Library assistant
- Bookkeeper
- Personal and home care aide
- Handyman
- Medical assistant
EditTips
- Even in retirement, it is important to keep watch on your credit reports. You should check your credit report annually and question or correct any mistakes that you see.
EditSources and Citations
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