In retirement, borrowing needs diminish, leading many seniors to neglect their credit, because it no longer seems important. However, companies use credit scores for more than just lending: Insurance companies evaluate credit to determine rates, especially among car insurance providers; most utility companies and mobile phone providers use credit to determine deposit requirements and account qualification. Even employers can review your credit score for hiring and promotion decisions.
With the use of credit extending well beyond lending, it is important to avoid common credit mistakes that can impact your scoring and access to the best terms and pricing. Based on a recent Trans Union study 20% of seniors are maintaining sub-prime credit scores., Finding ways to improve your score could save you money throughout retirement.
Here are the top credit mistakes Baby Boomers make when managing credit in or near retirement:
Mistake #1: Underestimating your life expectancy. Seniors are living longer, and life expectancy continues to increase. In 2010, according to the Center for Disease Control, men could expect to live an average of 17.7 additional years, giving them a life expectancy of nearly 83 years. Women can expect to live 20.3 years on average, beyond the age of 65, giving them a life expectancy of just over 85. 4.7% of the population over 65 is also over 90, and the number of centurions has increased by 44% since 2000.
Mistake #2: Carrying too much debt into retirement. During your time in retirement you may find the need to downsize and finance a final home, purchase a vehicle, or borrow money in some other fashion to preserve cash reserves. Having good credit will help you secure the lowest rate and best terms, potentially extending your savings further in retirement. Credit card balances continue to rise in every age category, including those over 75, and seniors file bankruptcy more frequently than any other age group. Too much debt in retirement can decimate savings and lead to major financial problems in retirement when it is harder to increase income. Unexpected expenses or a decline in health can leave Baby Boomers with few options for creating additional cash flow when reserves run dry. Debt levels can impact every aspect of your life from reduced cash reserves, increased cash flow needs, and a lower credit score. Additionally, seniors are the fastest growing age category for student loans, and student loan defaults, leaving many seniors facing garnishment of Social Security wages
Mistake #3: Co-signing loans to help family members. Whether you decide to co-sign a student loan or an auto loan to help a child or grandchild, there are significant risks involved. Should the primary borrower fail to make payments on time, co-signing puts your name on the loan as a guarantor, and legally binds you to pay the lender back.. As a co-signer, it can be difficult to get account information, which leaves you vulnerable to credit problems without the opportunity to bring the loan current before a negative mark affects your credit report. If you decide to co-sign, ensure you understand all the terms and track payments just as you would a personal loan in your name. Alternative options could be to give the family member, a personal loan, a gift, or saying no.
Mistake #4: Not checking your credit at least once a year. Once per year, you can receive a free copy of your credit file from each of the three major credit bureaus (Equifax, Trans Union, and Experian). It is also free to review your credit at www.annualcreditreport.com. Doing so will help you understand credit better, identify fraudulent accounts, and correct errors. The Society of Certified Senior Advisors estimates only 25% of seniors, check credit at least yearly.
Mistake #5: Using a reverse mortgage for cash flow needs. The advertising for reverse mortgages sounds like an excellent plan.:No payments, remain in the home until you move, sell or die, and you gain access to the equity you have built up over time. However, there are many risks and costs associated with a reverse mortgage, which could leave a surviving spouse homeless, or trap you in a home that is too much in the way of maintenance or high taxes. Before committing to a new loan, understand the costs and the risks to ensure it is the right move for you and decrease the chances of losing your home through an option designed to save it.
Mistake #6: Not recognizing the risk of identity theft. Many thieves target seniors through phone calls, stealing credit card or bank information, or conning you into disclosing personal information they can use to open fraudulent accounts in your name. Checking credit regularly, protecting passwords and having family members assist with account tracking can prevent identity theft. Taking proactive steps will help to protect yourself and your money.
Mistake #7: Debt Avoidance. One of the most prominent goals, in or near retirement, is debt elimination. You work hard to pay off credit cards and then close each card as they reach a zero balance. The challenge with few or no open lines of credit is that scoring agencies like FICO consider credit card utilization as 30% of the scoring algorithm. Utilization is a ratio that compares open lines of credit to actual debt balances. To keep your credit score up, and eliminate debt, keep a few credit cards open and pay the balance off each month. This strategy will not result in debt accumulation and will keep your credit score in good condition.
Credit factors into many areas of your life and therefore matters at all stages of life, even if you do not think you need to borrow money again. You can avoid common credit mistakes and maintain good credit well into retirement.