Does retirement affect your credit score?

Retirement is hopefully a point in your life when you can change gear, find a new rhythm, and indulge in hobbies and interests you never had the time for in the rat race. But do you have to worry about your credit report when you move from a regular salary to taking a pension? Does being retired affect your credit score? Let’s find out.

‍Retirement doesn’t directly impact your credit score. Your report doesn’t hold any personal information like age, marital status or income. It also doesn’t record retirement.

While your report doesn’t know you’ve got your “gold watch”, it is possible retiring can still impact credit and your ability to borrow. Put the kettle on, we’ve got some tips to keep your history active after you retire.

How does retirement affect my credit score?

Retirement itself won’t increase or reduce your score. In fact, it won’t even know that you’ve packed up your cardboard box from the office and taken your “Happy Retirement” cards from your colleagues home.

Your credit report is a record of how you have borrowed and paid back money, your use of credit cards, and mortgage management over the previous years. Loans which have been paid off in that time period will also be listed, as will any major financial issues you may have had, like bankruptcies.

But while your retirement won’t affect your score, it could change your ability to borrow money in the future. Lenders look for evidence of a steady income when you make loan or credit applications.

By shifting from regular pay to a pension, pension credit or savings, you will be changing your pattern of income and expenditure. This affects your debt-to-income (DTI) ratio.

What is my debt-to-income (DTI) ratio?

Your DTI ratio is calculated by taking your total monthly expenses — like rent or mortgage, credit card payments, loan repayments and child support — and then dividing it by your gross (pre-tax) income. Multiply the answer by 100 to find your percentage. Lenders typically look for a DTI ratio below 43%.

What you are likely to notice when you retire is that your expenses reduce. You may be in a position to pay off your mortgage. Your vehicle usage can decline meaning you’re not financing it as often. And many people choose to downsize their homes when they retire, meaning energy bills are often reduced.

‍But if you have any debt, your drop in income when you retire will likely impact your DTI ratio. This in turn will affect your ability to borrow, regardless of your history.

Why you should keep an eye on your credit report after your retire

It’s easy to think that your report no longer matters when you enter retirement. You may have put the brakes on your borrowing. Especially if your mortgage is paid off, or you’ve cleared a big debt.

So why should you care about your credit report after you’ve retired? Here are three reasons why you should keep an eye on it after you retire:

1. Interest rates on existing credit

If you do have a credit card or a debt which you are still paying off in your retirement, you might find that the interest rates you were offered when you had a steady income are no longer applicable once you retire.

‍Credit card companies and lenders often have the right to change the details of their loan offers. If your report is affected by something in your retirement and your score goes down, you could find that your repayments on any existing debts increase or that your account is closed.

2. Security deposits

If you are required to put down a security deposit during your retirement, there is a chance that the company will do a credit check on you.

If your report has weakened since you left work you could find that the required deposit amount is higher than it would otherwise be.

3. Insurance rates

Keeping your possessions insured is no less important during your retirement than it is while you’re collecting a pay-check every month. Insurers will often check your history when they build your rates.

‍A report which shows a strong credit history  will likely make a difference to these rates, meaning you could pay lower insurance premiums if you’ve looked after yours.

How to keep my credit strong in retirement?

Just like in any phase of your life, while it may not be the most important thing, keeping your report as healthy as possible helps you maintain clear finances, a clear head and clear road ahead of you when it comes to having the best options.

How can you give yourself the best chance as you go into retirement? Here are some things to consider.

Keep up your repayments

It might sound obvious, but making sure your finances don’t slip is a great way to keep your report healthy and happy. It’s worth sitting down with your new retirement finances to make sure you are going to be able to make your repayments.

Work out when your income lands and organise your expenditure to go out soon after to avoid accidentally overspending. Set up automatic payments where possible so you don’t forget a bill or repayment.

Limit your credit balances

Generally you want to make sure you’re using as little of your credit limit as possible. It’s not a problem to dip into it, of course — that’s what it’s for! But the credit reference agencies (CRAs) suggest that keeping your borrowing below 25%-30% of your total limit is the sweet spot. Spending in excess of 30% will have a big impact on your report and likely lower your score.

Keep old credit accounts alive

If you have a credit card account that you’ve held for a long time but paid off, don’t close it. When you have a long history of repaying your balances on time, that card will be doing wonders for your report.

‍Although, if you do pay high fees to keep the card open, it will be worth weighing up that cost against the benefits of having a long, healthy credit history.

Keep using your credit 

Showing positive activity on your credit cards and accounts will help your report to stay healthy. An active card, where you make small payments and repay them every month, builds your history more than idle or disused cards.

‍Is there a small regular monthly payment that you make? Like a subscription box or a regular activity? Consider popping this onto an idle credit card and setting up an automatic payment into the account just to keep it ticking over.

Keep an eye on it!

Retirees are the most likely to be targeted by scammers and identity thieves. You should keep a frequent eye on all your accounts and cards as a matter of course.

Check there isn’t anything that will impact your report that you’re not responsible for. But also you should check your score at least once a year to make sure there aren’t any surprises.

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