5 credit tips before you retire
By Dawn Papandrea
February 25, 2015
Today's retirees are active and often approach their nonworking years as the second chapter of their lives. As such, maintaining good credit is as important for a retiree as it is for younger people.
“Retirees still want and need the convenience of credit. They probably travel or do things around their home area where it's more convenient and safer to use a credit card than it is to pay cash,” says Mike Sullivan, director of education for Take Charge America, a national nonprofit credit counseling agency.
But as you age, there are differences in how you should manage your credit. Before you kiss the workforce goodbye for good, here's what you need to know about keeping your credit strong and agile in your senior years.
1. Getting new credit could be tough
Even if you have a great credit score, one of the biggest factors that lenders and creditors look at when sizing up a new credit applicant is income. “You want to be sure you have available credit before you retire and maintain that credit,” says Sullivan.
It's important to understand that when you're not receiving wages anymore, credit card companies will look at you differently, says Nancy L. Skeans, partner at Schneider Downs Wealth Management Advisors. While lenders can't discriminate based on your age and a host of other factors, due to the Equal Credit Opportunity Act, they can look at other factors. For example, one of Skeans' clients had a large portfolio, but could not get his card company to raise his credit limit because he did not have a W-2, she says. Before retirement, look at the cards you have and assess if you might want a new one or wish to increase your available credit. If so, do it before you stop working.
Likewise, Skeans recommends opening up a home equity line of credit before it's too late. “You don't ever have to use it, but at least you'll have that access to cash just in case.”
2. Look out for scams
“Seniors are more likely to be targets of scams and identity theft, so they need to be even more aware of this possibility,” says Sullivan. As such, the golden years are not the time to retire from checking your credit report.
“As we age, we need to automate as much as we can to protect our credit. If you forget just one payment or two, it can affect your credit score.”
–Mike Sullivan, Take Charge America
Try to look at your credit report at least once a year to make sure it's correct and no one is fraudulently using your name or Social Security number, says Skeans. You're entitled to a free one from each of the three major credit bureaus (Experian, Equifax and TransUnion) annually via AnnualCreditReport.com. If you see an account you don't recognize, an address that you've never had or other information that's unfamiliar to you, get your report corrected immediately.
Beyond that, it's important to keep your personal information locked up in your home if you have people coming in and out — or better yet, keep important information in a safe-deposit box — and be aware of phone and Internet scams that target seniors so that your financial information isn't up for grabs. AARP frequently updates information about scam trends.
3. Have a backup plan ready
One of the unfortunate parts of getting older is that your health is more likely to lapse, which is why Sullivan is a proponent of automated payments on credit accounts. “As we age, we need to automate as much as we can to protect our credit. If you forget just one payment or two, it can affect your credit score,” he says. Also, if you have adult children or someone close to you who you trust, it's important to set up a power of attorney so someone can step in and manage your finances in the event of an emergency, he says.
4. Don't let generosity get the best of you
If you're financially stable, it's possible that your children or grandchildren may come to you for financial help. Just be careful about the type of help you give, says Sullivan. “In my experience, I have come down on the side that it is always a bad idea for a senior to co-sign for any kind of a loan,” he says. “If they're asking, it's probably because they have a history of not paying off their debts or have bad credit.” Once the primary borrower misses one payment, your credit will take the hit and lenders and collection agencies will start contacting you.
If you are fortunate enough to have resources, Sullivan says it's better to just write a check or give your family member a gift. That way, you are in control of what you're giving or lending, and it won't come back to haunt your credit rating.
If you decide to lend money, that can be equally dangerous in terms of your family dynamics, says Skeans. “Most of the time, it will never get paid back. If you're going to do it, formalize it. That way there are no misunderstandings that can cause a deterioration in the family relationship,” she says. Have them sign a simple note that outlines how much they are borrowing, when they will pay it back and any terms such as an interest rate. This can actually be handy come tax time if your loved one doesn't pay the loan back — you might be able to write it off.
5. A debt-free life trumps the best credit score
In your younger years, you may have learned that a healthy mix of credit was important for maintaining a good credit score. As you get older, that superior level of credit that is needed to get the best mortgage rates isn't as important as being free of mortgage or loan debt. “It's fine to keep using credit cards for convenience and emergencies, and that should be enough to maintain good credit,” says Sullivan. But you don't want to do the type of significant borrowing during retirement that would require an 820 FICO score, he adds.
Skeans says that boomers who are really savvy about managing their finances can and should use credit cards to their advantage. “Many use their cards to get the points and rewards,” she says. Putting everything on the card and paying it off every month is a great way to keep credit active and reap some rewards, as long as you pay on time and in full. As for other lending products? Skeans agrees with Sullivan: “One of the worst experiences was the 2008 financial crisis, and the most significant difference was that those with mortgage debt were much more worried because they were committed to writing that check every month,” she says. That's why if you can help it, it's best not to carry installment debt, such as car loans or mortgages, in retirement.
When your working days are over, managing your credit is as important as ever. By using lending products sparingly and keeping tabs on your overall credit health, your financial wisdom will only get better with age.