Why Your Credit Score Still Matters When You are Retired

May 7, 2024

Michael Landsberg, CIO, Landsberg Bennett Private Wealth Management

Does your credit score matter as much when you’re retired?

The answer is YES!

Retirees or those nearing retirement often find themselves questioning the relevance of their credit score.

Although retirement may shift your financial priorities and responsibilities, your credit score remains crucial. Many believe that once retired, their credit score no longer matters. However, this is a misconception.

A good credit score continues to play a significant role in your financial health, potentially influencing your lifestyle and financial options in retirement.

In this article, we will discuss:

• The misconception that credit score doesn’t matter in retirement persists.
• The key benefits of maintaining a good credit score throughout your retirement years.
• The potential implications of having a bad credit score when you’re retired.
• Practical tips for managing your credit effectively during retirement.

Common Misconceptions About Credit Scores in Retirement

The belief that credit score becomes irrelevant after retirement is a common misconception that can have significant financial consequences. Here’s why this notion is inaccurate:

1. Retirement Doesn’t Ensure Freedom from Debt

Most retirees look forward to living without debt commitments. However, they may occasionally need to borrow funds for emergencies, significant home renovations, or purchasing a new car.

Simply put, a higher credit score results in lower interest rates on loans, which can save tens of thousands of dollars over the life of the loan. Additionally, retirees who use home equity through reverse mortgages may find that a good credit score influences the terms and conditions offered.

2. Social Security and Savings Don’t Eliminate the Need for Credit

Even with social security benefits and substantial retirement savings, these resources may not fully cover all expenses. Retirement often brings unforeseen costs, such as medical emergencies or urgent home repairs, which can strain your finances.

In these situations, having good credit is crucial. It enables you to secure loans or credit lines at favorable interest rates, making it easier to manage these unexpected expenses.

Maintaining a strong credit score will help ensure that you can access the financial resources you need without facing excessively high interest rates, helping to protect your financial stability throughout retirement.

3. Credit Score Only Impacts Major Loans

While a good credit score is crucial for securing major loans, its impact extends beyond significant financial transactions. For retirees, a strong credit score can influence various aspects of daily life.

Landlords frequently check credit scores when evaluating rental applications, and a poor score may limit housing options or lead to higher security deposits. Similarly, many insurance companies consider creditworthiness when setting premiums, which can result in higher costs for individuals with lower credit scores.

Moreover, credit scores can affect the terms and rates of smaller financial products, such as credit cards or personal loans, which might be used for travel or other personal expenses in retirement. A good credit score also reflects financial responsibility, which can be beneficial in negotiating better terms on services and products. Maintaining a healthy credit score helps ensure that retirees can manage their finances effectively and enjoy a more comfortable lifestyle.

Read: How To Maintain Your Credit Score After Retirement

4. Credit Score is Fixed and Unchangeable in Retirement

It’s a common myth that once you retire, your credit score becomes a relic of the past—something that’s done and dusted. In reality, your credit score is far from fixed. Although it reflects your financial behavior up until now, it remains very much alive and responsive to your current financial habits. In fact, while in retirement your credit score could plummet. See it here.

The truth is, you can still influence your credit score after retirement. Paying your bills on time, keeping credit card balances low, and steering clear of new credit applications are all ways to keep your score healthy.

Debunking these myths is crucial for retirees. Your credit score isn’t just a number from your working years; it’s a key part of your financial toolkit. It impacts everything from loan rates to insurance premiums, and it can shape your financial choices well into retirement. So, while you might not be earning a paycheck anymore, keeping a close eye on your credit score remains a wise move.

Benefits of Having a Good Credit Score in Retirement

Credit is often thought to be irrelevant beyond a certain age, but in reality, it continues to be important after retirement. A good credit score can be very useful in your later years.

Let’s explore some of the key benefits that a strong credit score offers retirees:

1. Lower Interest Rates on Loans

Home Equity Loans and Reverse Mortgages: During retirement, unexpected expenses or plans such as home renovations may require financing. In such cases, having a strong credit score is crucial. A good credit score can help lower the interest rates on home equity loans and reverse mortgages. This reduction in interest rates can save retirees thousands of dollars over the life of the loan, making these financial tools more manageable and less of a strain on their retirement savings.

Other Loan Options: Beyond home-related loans, a high credit score plays a key role in the broader range of financial options available to retirees. With a strong credit score, retirees can more easily secure personal loans, car loans, or lines of credit. These lower interest rates can reduce overall borrowing costs, allowing retirees to stretch their income further. This flexibility can enhance their ability to manage unexpected costs or fund desired purchases without derailing their retirement plans.

2. Better Terms on Credit Cards

Reduced Interest Rates and Fees: Carrying a credit card with a strong credit score offers significant benefits. Retirees with good credit can enjoy lower interest rates on purchases and balance transfers, which can help save money on everyday expenses and during emergencies.

Additionally, a good credit history often qualifies retirees for credit cards with lower annual fees and reduced charges, making it more cost-effective to manage credit.

Travel Rewards and Perks: Many credit cards come with travel rewards programs that provide valuable benefits such as access to airport lounges and other travel-related perks. A high credit score can open the door to premium credit cards, which offer enhanced rewards and benefits.

These perks can improve travel experiences and add comfort during retirement, allowing retirees to make the most of their leisure time with fewer financial concerns.

3. Easier Access to Rental Properties

Landlords typically conduct credit checks as part of their tenant screening process. A strong credit score indicates financial responsibility and reliability, which can significantly impact your ability to secure a rental property.

• Increased Approval Odds: A good credit rating helps in enhancing your chances of being approved for rental properties. Landlords are more likely to view you as a responsible tenant who will pay rent on time and manage finances well. This can be particularly advantageous in competitive rental markets.
• Favorable Lease Terms: With a solid credit history, you may find landlords more open to negotiating lease terms. This can include benefits such as lower security deposits and more flexible lease agreements, including lease duration and pet policies.
• Access to a Wider Range of Properties: A commendable credit score can also expand your options for rental homes. You may gain access to premium apartments and properties in gated communities that have higher credit standards, giving you more choices in finding the ideal rental property.

4. Protection Against Identity Theft

Even in retirement, staying vigilant against identity theft is crucial. A good credit score can help you detect unauthorized activity more easily, as any suspicious changes are more noticeable.

Here’s how a strong credit score aids in protecting against identity theft:

• Early Detection: A good credit score reflects a history of responsible credit management. This means that any sudden, unexplained changes—such as new credit inquiries or accounts opened in your name without your authorization—will stand out more on your credit report. Early detection of such anomalies allows you to address potential identity theft quickly and take appropriate steps to mitigate damage.
• Credit Monitoring: Regularly monitoring your credit reports from the three major bureaus (Equifax, Experian, and TransUnion) is essential for identifying identity theft early. Those with good credit often feel more motivated to stay proactive with credit monitoring, which helps in catching fraudulent activity sooner. This proactive approach can make a significant difference in addressing issues before they escalate.
• Faster Resolution: Should you fall victim to identity theft, having a strong credit history can expedite the resolution process. Financial institutions and credit bureaus are more likely to respond promptly and work efficiently to resolve issues when your credit history is in good standing. A solid credit score can thus be an advantage in swiftly addressing and correcting any fraudulent activities.

5. Financing Medical Expenses Over Time

Unexpected medical emergencies can strain financial resources during retirement. One most recent report showed that in 2022 alone, the U.S. health care spending has reached $4.5 trillion or $13,493 per person.

A good credit score can help retirees access medical loans with lower interest rates, making it easier to manage medical bills without depleting retirement savings.

Here’s how:

• Lower Interest Rates: Medical loans typically offer lower interest rates compared to credit cards or personal loans. This can be more cost-effective over time, helping retirees cover unplanned medical expenses without excessive costs.
• Favorable Loan Terms: A good credit score can also lead to better loan terms, such as longer repayment periods and lower fees. This flexibility allows retirees to structure the loan to fit their financial situation, reducing stress on their retirement budget.
• Improved Access to Specialized Loans: For specific treatments or surgeries, specialized medical loans may be required. A strong credit score increases the chances of obtaining these loans, which often come with benefits tailored to medical needs.
• Understanding Medical Expense Trends: It’s also useful to consider that medical expenses tend to grow over time. A report from the Centers for Medicare & Medicaid Services shows a steady increase in healthcare costs, which can strain budgets, especially for retirees. By planning and using medical loans wisely, retirees can better manage these rising costs without compromising their financial stability.

Using medical loans wisely and only when necessary is important. A good credit score provides a safety net, offering access to affordable financing options and helping retirees manage unexpected medical expenses without exceeding their budget.

A few more points to ponder:

• Explore All Options: Before relying solely on medical loans, retirees should explore all available options, including government aids, Medicare coverages, and potential support from family members. This approach will help ensure that all possible resources are considered.
• Compare Loan Offers: It’s essential to compare loan offers from different lenders. This helps ensure you secure the most favorable terms and interest rates based on your creditworthiness and financial situation.
• Responsible Borrowing: Remember that medical loans must be repaid. Responsible borrowing practices, with a clear repayment plan, are crucial to avoid future debt burdens and ensure financial stability.

Understanding these benefits underscores how a good credit score remains a valuable asset, providing both financial security and flexibility, and enriching the retirement lifestyle.

Implications of Having a Bad Credit Score in Retirement

While a good credit score offers significant benefits in retirement, a poor credit score can lead to considerable challenges.

Here’s a closer look at the potential implications:

1. Higher Interest Rates on Loans

Financial Strain: A poor credit score often results in higher interest rates on various types of loans, including home equity loans, reverse mortgages, personal loans, and car loans. These elevated rates can create a considerable financial burden. For retirees living on a fixed income, the increased cost of borrowing may strain their retirement budget, making it harder to manage day-to-day expenses and potentially limiting access to essential resources.

Debt Accumulation: Higher interest rates can trigger a cycle of growing debt. As interest charges accumulate, retirees may find it increasingly difficult to manage existing debt. The compounding effect of high-interest rates can lead to mounting financial stress and hinder efforts to achieve financial stability. This escalating debt can further restrict retirees’ financial flexibility and impact their overall quality of life.

2. Difficulty Securing Loans:

Limited Access to Resources: Retirees with poor credit may struggle to secure loans that could help with essential expenses, such as home repairs, medical emergencies, or other unforeseen costs. This limited access can hinder their ability to manage various needs that arise during retirement, affecting their overall quality of life and financial flexibility.

Depleting Retirement Savings: When loans are not available due to poor credit, retirees might be forced to use their retirement savings to cover unexpected expenses. This can quickly deplete their savings, jeopardizing their long-term financial security and reducing their ability to maintain their desired lifestyle throughout retirement.

3. Limited Access to Certain Rental Properties

Housing Challenges: In the rental market, landlords often use credit scores to assess potential tenants. Retirees with poor credit may face significant limitations in housing options. They might find themselves in less desirable neighborhoods or locations far from necessary amenities and conveniences, affecting their overall comfort and quality of life.

Higher Security Deposits: Landlords may also require higher security deposits from renters with bad credit. This added financial burden can strain retirees’ budgets and make securing rental properties even more challenging.

Reduced Negotiation Power: Additionally, poor credit can reduce a retiree’s leverage in negotiating lease terms. Landlords may be less willing to offer favorable terms or make concessions, such as reduced rent or flexible lease durations, which could further limit the attractiveness and affordability of rental options.

4. Potentially Higher Insurance Premiums

Costly Coverage: Many insurance companies, including those offering auto and homeowner’s insurance, base their premiums on customers’ credit scores. Retirees with poor credit scores may face significantly higher insurance costs, placing an additional financial burden on their budget. This increased expense can strain their retirement income and limit their ability to allocate funds for other essential needs.

Denied Coverage: In some rare cases, insurers may deny coverage altogether to individuals with very low credit scores. This can leave retirees without necessary insurance protection, potentially exposing them to greater financial risks and hardships in the event of an unexpected loss or emergency.

Increased Out-of-Pocket Costs: Even if coverage is granted, poor credit may lead to higher deductibles and out-of-pocket expenses. This can further escalate the overall cost of insurance, impacting the retiree’s ability to manage other financial priorities effectively.

5. Negative Impact on Job Search

Specific Industries: In certain sectors, such as finance, law enforcement, or security services, a strong credit history is often viewed as a marker of financial diligence and integrity. Retirees with poor credit scores may find it difficult to secure positions in these fields, despite having relevant qualifications and experience. Employers in these industries may perceive poor credit as a potential risk factor, affecting their hiring decisions.

Part-Time and Supplemental Income: For retirees seeking part-time or supplementary income, credit evaluations can present a significant hurdle. Jobs involving financial transactions or sensitive information often require a favorable credit history as part of the hiring criteria. Those with poor credit scores may be excluded from these opportunities, limiting their ability to supplement their retirement income.

Perception of Reliability: Even outside specialized sectors, a poor credit score can create a negative perception of financial stability and reliability. This can disadvantage retirees in the job market, as employers might view a low credit score as indicative of broader reliability issues, impacting their chances of securing employment regardless of the job’s financial responsibilities.

6. Difficulties with Utility Services

Establishing New Service: Utility companies, including those providing electricity, gas, and water, typically conduct credit checks when setting up new accounts. A low credit score may lead to delays or even the inability to establish new services, causing inconvenience and potential disruptions in essential utilities.

Higher Security Deposits: If a utility company does approve you for service despite a poor credit history, it often requires a larger security deposit. This added financial burden can be especially challenging when relocating to a new home or managing on a fixed retirement budget.

Prepaid Services: In some cases, individuals with poor credit scores might be limited to prepaid utility services. These options are generally more expensive and less convenient than traditional postpaid services, increasing overall living costs and complicating financial management.

Compounding Stress: While these issues may seem minor, they can add to the stress and financial strain experienced by retirees. Maintaining a healthy credit score helps ensure smoother interactions with utility providers, avoiding the extra costs and inconveniences associated with lower credit ratings.

Note: If you are trying to improve your credit score using utility bills, it won’t help. Utility bills are typically not reported to credit bureaus and, therefore, won’t impact your credit score. Read more here: Can I Improve My Credit Score With a Utility Bill?

Why Credit Score in Retirement is Important in Securing Major Purchases?

Retirement brings about a slower pace of life, yet maintaining financial flexibility is essential. A strong credit score is crucial in facilitating significant purchases, helping to ensure a comfortable lifestyle during retirement.

Here’s how a good credit score influences significant financial decisions:

1. Homeownership

Mortgage Affordability: A robust credit score often leads to lower interest rates on mortgages. Lower interest rates can turn the hope and aspiration of buying a new home during retirement into reality. This enables you to have better usage of retirement funds and the option to invest in a more valued property.

Qualifying for Loans: High credit ratings increase the likelihood of obtaining loans with advantageous terms, such as minimal down payments and extended repayment durations. These conditions lessen the initial financial load when purchasing a home and help manage monthly expenses more effectively within a retirement budget.

2. Home Renovations

Unexpected Repairs: Even well-kept homes might need sudden repairs or improvements. A strong credit score will help to ensure access to home improvement loans or credit lines with reduced interest rates, easing the financial impact of these unforeseen needs.

Desired Upgrades: Whether planning a kitchen overhaul, bathroom update, or making the home more accessible, a reliable credit score aids in securing financing at favorable rates. This financial leverage lets you tailor your home to better suit your retirement lifestyle, helping to enhance comfort and satisfaction.

3. Car Purchases

Lower Interest Rates: When replacing or buying a new vehicle, it is common for people to take out loans. Those with good credit can qualify for car loans with much lower interest rates than those available to other borrowers; over the life of the loan, this could save them thousands of dollars. That means their monthly payments will be smaller too, which frees up more retirement income for everything else.

Better Loan Options: Sometimes car dealerships or manufacturers offer exclusive financing deals to customers who have good credit scores. These promotions might come with lower interest rates, longer warranties, and other perks that sweeten any deal on wheels.

4. Travel

Financing Dream Vacations: Retirement offers the perfect opportunity to explore new destinations and enjoy leisurely travel. To make the most of your travel plans, leveraging credit cards that offer travel rewards can be invaluable. Many travel credit cards provide benefits such as points, miles, and airport lounge access, which enhance your travel experience. By using rewards points or miles, you can turn an otherwise expensive trip into a more affordable one, maximizing the value of your travel spending.

Securing Travel Loans: Although using personal savings for travel is ideal, there may be times when borrowing money is necessary to finance a larger trip. A good credit score can significantly help improve your ability to secure a travel loan with lower interest rates. This makes borrowing more cost-effective and can help manage the expense of a dream vacation while keeping your finances in check.

Additional Travel Benefits: Beyond loans and credit card rewards, a strong credit score may also provide access to premium travel services and offers. This includes better rates on travel insurance, upgrades, and other perks that can enhance your overall travel experience. Maintaining a good credit score ensures you have more options and can take advantage of the best deals available.

5. Assisted Living Facilities

Planning for the Future: Although it may seem far off, planning for potential future needs, such as assisted living, is important for retirees. While credit scores might not be a direct requirement for all assisted living facilities, they can still play a role in demonstrating financial responsibility. A good credit score can reflect sound financial management, which may enhance your chances of securing a place in your preferred facility.

Facility-Specific Policies: It’s important to recognize that credit score requirements and their importance can vary widely among assisted living facilities. Some facilities may place more emphasis on financial stability as part of their application process, while others might prioritize medical needs or compatibility with the existing resident population.

Alternative Financial Verification: Even if a credit score is not a primary factor, facilities might request other forms of financial verification to assess your ability to afford their services. This could include bank statements, proof of income, or other documentation that confirms your financial readiness.

Maintaining a good credit score not only helps with immediate costs but also contributes to long-term financial stability. Lower interest rates and favorable loan terms can lead to significant savings over time, allowing you to manage your retirement budget more effectively. This financial flexibility supports a more secure and comfortable lifestyle as you navigate the various aspects of retirement.

Quick Tips for Managing Credit in Retirement

Maintaining a good credit score throughout retirement offers significant benefits, as discussed previously.

Here are some key tips to help ensure responsible credit management during your golden years:

1. Consult a Fiduciary Financial Advisor

Specialist Guidance: Consider seeking advice from a fiduciary financial advisor specializing in retirement planning. They can provide personalized guidance on managing your credit effectively, considering your specific financial circumstances and retirement goals.

Debt Management Strategies: A financial advisor can help you develop strategies for managing existing debt, minimizing interest payments, and creating a plan for responsible credit utilization throughout retirement.

Retirement Income Optimization: They can also advise on optimizing your retirement income sources to help ensure you have sufficient resources to cover your expenses without relying heavily on credit.

2. Monitor Your Credit Report Regularly

Early Detection of Errors: It’s crucial to regularly monitor your credit reports from all three primary bureaus (Equifax, Experian, and TransUnion) at least once a year. This allows you to identify any potential errors, such as fraudulent accounts, inaccurate information, or identity theft attempts, promptly.

Maintaining Accuracy: Disputing any inaccuracies on your credit report immediately helps ensure its accuracy and protects your credit score from negative impacts.

Complementary Resources: You can access no-cost credit reports from each bureau annually through AnnualCreditReport.com.

3. Pay Bills on Time and Keep Credit Card Balances Low

Payment History: Your payment history is one of the most significant factors influencing your credit score. Consistently paying all your bills on time, including credit card statements and loan payments, demonstrates responsible financial management and positively impacts your credit score.

Credit Utilization Ratio: Keeping your credit card balances low relative to your credit limit is crucial. A high credit utilization ratio (the percentage of your credit limit you’re using) negatively impacts your credit score. Aim to keep your balances below 30% of your credit limit for optimal scoring.

4. Only Apply for New Credit When Necessary

Minimize Inquiries: Frequent applications for new credit cards or loans can lead to multiple hard inquiries on your credit report, which can temporarily lower your score. Only apply for new credit when absolutely necessary and carefully consider the long-term financial implications.

Responsible Borrowing: If you do need to borrow money, ensure you can comfortably afford the monthly payments and interest charges associated with the new debt. Avoid taking on excessive debt that could strain your retirement budget.

5. Dispute Any Errors on Your Credit Report Promptly

Protecting Your Score: If you identify any errors or inaccuracies on your credit report, dispute them immediately with the respective credit bureau. The Fair Credit Reporting Act (FCRA) grants you the right to have inaccurate information corrected, which can significantly improve your credit score.

Timely Resolution: Act promptly when disputing errors. The credit bureaus are required to investigate your dispute within a specific timeframe and update your report accordingly if the information is found to be inaccurate.

By following these tips and maintaining responsible credit management practices, retirees can help ensure their credit score remains strong throughout their golden years, providing them with financial flexibility, access to favorable loan terms, and a sense of security during retirement.

Wrapping up

Maintaining a good credit score throughout retirement is not simply a relic of your working years; it’s a powerful tool that unlocks significant financial benefits and enhances your overall security.

By prioritizing responsible credit management practices, you can secure favorable loan terms with lower interest rates, gain access to desirable financial products and services, and protect yourself from unexpected financial difficulties.

In essence, a good credit score empowers you to enjoy greater financial flexibility, access to resources, and a sense of security during your golden years, ensuring a more fulfilling and secure retirement.

Disclaimer:

Landsberg Bennett is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Advisory services are offered through Hightower Advisors, LLC. All information referenced herein is from sources believed to be reliable. Landsberg Bennett and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.