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 score when you move from a regular salary to taking a pension? Does being retired affect your credit score?
Retirement doesn’t directly impact your credit score. Your credit report doesn’t hold any personal information like age, marital status or income. It also doesn’t record retirement.
So your credit score doesn’t know you’ve got your ‘gold watch’. But retiring can still impact on credit and your ability to borrow. Put the kettle on, Loqbox has some tips to keep your credit score active after you retire.
How does retirement affect my credit score?
Retirement itself won’t increase or reduce your credit 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 credit 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 credit score.
Why does my credit score matter when I retire?
It’s easy to think that your credit score 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.
Your credit score doesn’t seem to care that you’ve retired, so why should you care about it? Here are 3 reasons why you should keep an eye on your credit score 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 you let your score slip in your retirement 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 search on you.
If your credit score has dropped 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 credit score when they build your rates.
A lower credit score will likely impact on these rates, meaning you pay higher insurance premiums.
How to keep my credit score up in retirement?
Just like in any phase of your life, while it may not be the most important thing, keeping your credit score 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.
So how can you give yourself the best chance as you go into retirement? Loqbox has some great tips.
Keep up your repayments
It might sound obvious, but making sure your finances don’t slip is a great way to keep your credit score healthy and happy. It’s worth sitting down with your new retirement finances to make sure that 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 your credit limit, of course - that’s what it’s for! But the credit reference agencies suggest that keeping your borrowing below 25%-30% of your total credit limit is the sweet spot. Spending in excess of 30% will have a big impact on your credit score and likely lower it.
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 credit score.
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. But keeping its legacy running will help your credit score!
Keep using your credit
Showing positive activity on your credit cards and accounts will help your credit score to stay healthy. An active card, where you make small payments and repay them every month, builds credit score more than idle or disused cards.
Is there a small regular monthly payment that you make? Like a subscription box or regular activity? Consider popping this onto an idle credit card and setting up an automatic payment into the account. Just 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 credit cards as a matter of course.
Check there isn’t anything that will shrink your score that you’re not responsible for. But also you should check your credit scores at least once a year to make sure there aren’t any surprises.
You can check them for free, as often as you need to and without harming them by using one of these services:
*By the way, if you do sign up for ClearScore using this link, Loqbox receives a little commission.
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