You spent your whole life borrowing money, building your credit and paying down debt. So, when you cross the retirement threshold the last thing you may be thinking of is your credit score. But, regardless of your borrowing needs going forward, your credit score still matters for a number of reasons. At the very least, you can be sure your existing creditors are pulling your credit score periodically. If they do not like what they see, they could change the status of existing credit accounts. The good news is, if you have a good credit score going into retirement, it is fairly easy to keep it. If your credit score has been on the decline in retirement, these six tips can give it a boost.
Your credit score in retirement is calculated in exactly the same way as when you were working. If you understand the anatomy of a credit score, you can focus on the aspects you can change. There are a lot of moving parts in your credit score, which means there are a lot of opportunities to improve your score.
• Your payment history includes your on-time or delinquent payment record and is 35% of your score.
• Your credit utilization rate is the amount of debt you carry in relation to your credit limit. It is 30% of your score. Generally, if your balances exceed 25% of your credit limit, your score is negatively affected.
• The length of your credit history accounts for 15% of your score. The longer the history, the better.
• Adding new credit can reduce your score, although the weighting is only 10%.
• Your mix of credit can also affect your score. A heavy reliance on consumer-finance debt can lower your score. This factor weighs in at 10%.
You cannot improve your score if you do not know it. By law, you can receive a free credit report from each of the major credit reporting agencies once a year. You may need to pay a separate fee for your credit score, or you can obtain a free score from websites such as CreditKarma.com.
You probably have not looked at your credit report in a while. The vast majority of credit reports contain errors, such as misapplied payments, incorrect credit limits and even incorrect Social Security numbers that can drag the histories of other people into your own. By law, the credit bureaus must correct errors. You can see your score improve instantly.
The biggest weighting of your credit score is your use of credit. If you stop using your credit, you could lose your credit history. You must be able to demonstrate a constant record of on-time payments. To do that, you need to use your credit cards regularly, but pay off the balances monthly.
Make sure your total credit utilization does not exceed 25% of your total credit limit. If you have three credit cards with a total credit limit of $15,000 and your total balance on your cards is $5,000, your credit utilization is 30%, which puts pressure on your score. Try to keep your credit utilization to below 20%.
For most people trying to improve their credit scores, the instinct is to remove old credit accounts from their reports. This can actually hurt you by shortening the length of your overall credit history. The advantage you have is your long credit history. If you need to cancel accounts, cancel your youngest accounts. Also, if you are carrying credit card debt, by reducing your available credit, you increase your credit utilization ratio, which can lower your score.
When applying for credit, lenders ping your credit report to determine your credit worthiness. Each ping or hard inquiry into your credit past can lower your credit score. Be very judicious in applying for new credit. Once you boost your credit score, it requires some annual maintenance to keep it there. Use your free access to your three credit reports each year to check your credit history and report any errors. Keep an eye on your credit utilization, and keep using your credit cards to purchase budgeted items.