Editorial Policy

5 Ways to Avoid Being Overwhelmed by Credit Card Debt When You Retire

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By Eva Norlyk Smith, Ph.D.
March 16, 2011

With age comes wisdom, but not necessarily financial security: Recent studies have shown that, thanks in part to the recession and the often hard-to-predict trajectory of income and expenses, America’s seniors are racking up credit card debt like never before.

A new study from CESI Debt Solution found that 40 percent of seniors who have accumulated debt during their retirement years don’t think they’ll be able pay it back in their lifetime. The same survey also found that over half of retirees had outstanding debt when they stopped working.

The numbers were bad even before the recession started, say researchers. The average outstanding credit card balance for seniors increased 26 percent between 2005 and 2008, rising from $8,138 to $10,325 in just three years. Additionally, the percentage of seniors filing for bankruptcy jumped 178 percent between 1991 and 2007.

At the root of seniors’ financial woes is often a perfect storm of unexpected events. Seniors tend to have more medical expenses, and they are on a fixed income that typically is smaller than what they were earning while working — making them particularly vulnerable to problems. Considering the rising cost of prescription medications and the depletion of retirement funds that many faced after the stock market crash, it’s no surprise that many older Americans increasingly are forced to turn to credit cards to make ends meet.

Unfortunately, while credit cards afford an easy short-term solution, accumulating excessive credit card debt will create even greater problems in the long run. If you are looking to retire, or have parents that are retired, here are some steps to stay clear of credit card issues in the future:

1. Retire credit card debt before you retire. When looking towards retirement, expect the unexpected. New expenses are likely to pop up in retirement, so if you are shouldering excessive credit card debt, you are better off waiting a year or two before you retire. That way, you can establish a more solid financial footing first.

2. Don’t use plastic to fill in the gaps. Adjusting to a more limited retirement budget can be a challenge. It’s never easy to scale back one’s lifestyle, particularly when you’re past your late sixties. It’s also tempting to turn to plastic to fill in the gaps. However, if that monthly credit card balance keeps going up each month, then you are living beyond your means. The earlier you recognize the issue and take steps to deal with it, the easier it is to tackle. Conversely, waiting too long can lead to serious financial hardship.

3. Live below your means. A common mistake many seniors make is to calibrate retirement spending according to anticipated future income from, say, the sale of a house or from investment earnings. Unfortunately, that house could sell for less than expected and even the safest of investments can turn south, leaving you with a lot less in retirement savings than you anticipated. To keep a safety zone, scale living standards to less than what you think you can really afford.

4. Don’t fall for credit card offers. Rewards credit cards and 0 percent APR credit card offers can seem like a great way to save a little money. But, unfortunately, the more credit cards you have, the harder it is to keep track of them and the easier it is for credit card spending to get out of hand. If you’re already retired or are planning to do so soon, you need to be extra careful about what kind of credit risks you take.

5. Keep your credit file active. Credit cards are a necessary part of modern life. While it’s tempting to simplify by simply cutting up all credit cards, that won’t seem like such a smart idea next time you’re shopping online or looking to make a car or flight reservation. Instead, keep 2-3 credit cards active, but charge only what can easily be paid off each month.