After decades of working hard and saving, retirement can bring big changes to your finances. Another potential change is a decrease in your credit score.
To be clear, retirement does not directly affect your credit score. But other financial factors — like whether you’re taking out a car loan or still have a mortgage — can, and those factors often change in retirement.
Why your credit score may go down in retirement
Paying off a loan, car loan or similar financial product can lower your credit score. That’s because it reduces your debt mix, which refers to how many loans and lines of credit you have under your name. If you simplify your finances by closing old credit cards, your score may improve because it affects your credit history.
If a retiree finds that because they have a low income, they are relying more on credit cards (which may happen while waiting for Social Security), they may see their credit utilization ratio increase. A high rating can lower your credit score.
5 ways to stop bleeding
There are steps you can take to help give your score a boost.
- Make the necessary payments automatically: Payment history is a major factor affecting your credit score, and this strategy ensures that you don’t miss payments.
- Keep credit utilization low: Use your savings and other sources of income if necessary to avoid credit card debt. Low credit utilization is another important part of your credit score.
- Don’t close old credit cards that don’t charge: Keeping old cards open can improve your credit history, which often translates to higher credit scores. However, it is worth closing certain cards to reduce the risk of fraud, avoid overspending and eliminate annual expenses.
- Create a retirement income calendar: Calculate how much you will receive from Social Security, portfolio withdrawals, pensions and other income sources to ensure you don’t overspend. Overuse risks high credit utilization rates and missed payments.
- Check credit reports for errors or fraud: You can review a free copy of your credit report every week through the three major credit bureaus. If you find an error, report it immediately.
What not to panic about – and when to act fast
A small dip in your credit score is no reason to panic, especially if you don’t plan to take out a loan, refinance, move, buy a car or apply for a loan anytime soon. Lenders, landlords, service providers and insurers in some states will review your credit score so it is best to maintain a good credit score with these groups.
However, it is very important to examine why your credit score is declining. For example, your credit score may drop because you have paid off your loan, which is not cause for alarm. But a low credit score becomes a problem if late payments and high credit card balances are the main reasons your score is sinking, as that can be a persistent behavior. After that, it is important to fix your credit score by paying on time and getting out of credit card debt. It’s the same as identifying theft that allowed someone else to take out a loan in your name.
