When you enter your retirement years, you can leave a lot of things behind, such as that awful commute and your nine-to-five wardrobe. With your mortgage paid off and your retirement account flush, you may also think you can leave your credit score behind. Think again: While you may not have any foreseeable borrowing needs, it's still important to maintain a good credit score in retirement. Here, seven reasons why this advice makes sense.
1. Keeping Your Insurance Costs Down
Your homeowners and auto insurance carriers use credit scores to determine your premium rates. If you have a good credit score, you are deemed to be more responsible, and, therefore, a better risk.
Even in retirement, you should compare insurance rates periodically to see if you can save money. With a high credit score, you will have more options available to you and more leverage to negotiate rates.
2. Refinancing Your Mortgage
Keep your options open for refinancing your mortgage. A good credit score would allow you to refinance more easily if mortgage rates should drop. “By maintaining a high credit score, you can obtain the best interest rates possible,” says Carlos Dias Jr., wealth manager at Excel Tax & Wealth Group in Lake Mary, Fla.
If your financial circumstances worsen, you could access your equity through a cash-out refinance.
3. Moving or Downsizing Your Home
You may want to move to a different location, or you may decide to downsize for simpler and more affordable living. If your move entails leasing a place, you will need a good credit score to get the approval of the property owner. If the move requires any financing or refinancing, your credit score will dictate the terms of the loan.
4. Saving When You Spend
You’re going to spend money in retirement, so you might as well save by using a rewards credit card. The best rewards credit cards give you cash back or cash rewards on most purchases, such as gas, groceries and travel, and they are only offered to people with high credit scores. If you pay your card balance in full each month, you won't incur any interest charges. (For more, see Rewards Credit Cards.)
5. Taking Care of Family
If a family member gets in financial trouble, you may not want to dip into your savings to help them out. You could loan money via a credit card cash advance or line of credit, or you could co-sign a loan. In either case, you would need a good credit score to be able to access a lump sum of cash at a low rate of interest.
6. Emergency Expenses
If you have planned well for retirement, you should have at least six months' worth of living expenses set aside as a cash reserve for emergencies. If you run through your cash reserve, you'll need to borrow money to pay for unexpected events, such as a major car or home repair, or a major medical expense. Keep your credit score up to ensure your credit card issuers will approve a sufficient credit limit.
7. Following Your Passion
For many people, retirement is their second act, with a chance to do the kind of work they really love. Starting a business doesn't necessarily require a lot of capital, but there will be startup costs. A good credit score will ensure that you have access to inexpensive credit as a source of capital when you need it.
The Bottom Line
To maintain a high credit score in retirement, be proactive in using and monitoring your credit. Continue to use your credit cards. A large portion of your credit score is based on your payment history. If your accounts become inactive and there is no credit history, it could hurt your credit score. Use your credit cards to pay for budgeted expenses, and then pay the balance in full every month.
“The best way to maintain a good credit score in retirement is paying debts and balances on time. Besides that, stay away from accruing large balances, since a high credit utilization ratio will result in a lower score,” says Dias.
Monitor your credit closely. Retirees are a main target for identity thieves who can potentially destroy your credit history. Track your credit score; if it changes, look at your credit report to learn the reason for the change. You can receive three free credit reports a year – one from each of the three credit reporting agencies, Equifax, TransUnion and Experian. (For more, see How do I get my free credit report and score from each credit bureau?)