It is often a good idea to get rid of debt before retirement. Getting Rid Of Your Credit Score? Not so much.
People who stop using credit also stop generating enough data to build a credit score, the three-digit number used to measure creditworthiness. Not having a score can make getting a loan harder and more expensive. Even if you’re sure you’ll never borrow again, a lack of a credit score can make insurance, cell phone plans and security deposits more expensive.
Luckily, you don’t have to be in debt to have a good credit score. However, you will need to use credits.
More people are in debt, but millions are ‘credit retirees’
According to Federal Reserve data, older people are more likely to have mortgages, car loans, credit card balances and other debt in retirement than they were a generation ago. Seventy percent of households headed by someone aged 65 to 74 had debt in 2019, the latest year available from the Fed’s Consumer Finance Survey. This is compared to 51.4% in 1998. Among households with a person age 75 and older, 51.4% had debt in 2019, compared to 24.6% in 1998.
But this still leaves a sizeable population of older people who are unindebted and not actively using credit. Leading credit scoring firm FICO has found that 7.4 million people are “credit retirees,” who have a good credit history but no active accounts, says Ethan Dornhelm, FICO’s vice president for scores and predictive analytics. There were some young people who might have switched to a cash-only lifestyle, but most were older: Dornhelm says the average age of a Credit retiree was 73.
And credit scores can “retire” relatively quickly. Dornhelm says the FICO scoring formula used in most loan decisions requires at least one account on someone’s credit report to be updated within the last six months.
Rival scoring company VantageScore looks back at least 24 months for updated accounts, says Jeff Richardson, senior vice president of marketing and communications at VantageScore Solutions.
Dornhelm says the average length of time since updating an account, between credit lapses, was more than four years.
How Much Can Retiree Credits Cost You?
A paid off mortgage and no other debt may be helpful when you retire on a fixed income. You won’t need to tap into your savings or use your limited income to make loan payments. But maintaining good credit can be helpful if you need to borrow to pay an unexpected expense, finance a late-in-life move, or deal with a cash flow crunch, among other situations.
Life is unpredictable, and some people can be certain they’ll never need credit again, says Bruce McCleary, senior vice president of communications at the National Foundation for Credit Counseling.
“A good credit score can provide peace of mind, financial security, and flexibility, even if you don’t anticipate needing a new loan or credit card account during retirement,” says McCleary.
Even if your borrowing days are indeed behind you, a non-existent credit score can cost you in other ways:
- In most states, insurers use credit information to determine premiums for auto and home insurance.
- Getting a cell phone plan with bad or non-existent credit can be difficult, and cell phone providers often reserve their best deals for people with good credit scores.
- Utility companies may demand a large security deposit for those without a score.
- Senior housing – which includes assisted living facilities, continuing care retirement communities and even some nursing homes – may require applicants to pass a credit check.
One (or Two) Credit Card Solutions
Fortunately, you don’t have to go back into debt to maintain a good credit score. Using one or two credit cards and paying the balance in full each month should be sufficient. Card issuers report payments to the three major credit bureaus — Equifax, Experian and TransUnion — every month, keeping your accounts updated so your report can continue to generate a credit score.
However, try not to charge too much on the card, even if you pay in full. Using too much of your credit limit can hurt your score. The fewer active accounts you have, the more you can lose.
If you’ve already let your credit scores languish, it’s not too late to make them work for you again. Being added as an authorized user on someone else’s credit card may be enough to revive your score. Another option is a secured credit card, which requires a cash security deposit that is usually equal to the credit limit you get. Finally, some credit unions and online lenders offer credit-builder loans. These loans put the amount you borrow into a savings account that you can access after making all the monthly payments.
No matter what your age, a good credit score is worth the effort.
“If your credit activity continues and your credit score stays good, then you’re in the driver’s seat,” says Richardson.
This article was written by NerdWallet and originally published by The Associated Press.
Liz Weston, CFP® writes for NerdWallet. Email: [email protected]. Twitter: @lizweston.