Will Retirement Hurt Your Credit Score?

Whether you're just a year or so from retirement or have a decade or more to go, you may wonder if living on a reduced retirement income will affect your credit score. The short answer is probably not, as long as you continue to use credit in the same way that you've used it before.

Your credit score—the FICO score is the one used most often in the U.S.—is based on several factors that include:

• Your payment history, including your on-time and late payments for various accounts (35%)
• The amount of money that you owe (30%)
• The length of your credit history (15%)
• The amount of new credit that you have (10%)
• The types of credit that you have (10%)

That’s good news for retirees who have been careful to pay their bills on time each month and who may have a credit history extending back 40 years or more. Those factors account for 50 percent of the credit score. Although you may be less likely to have a mix of credit—you may have paid off your mortgage and probably aren’t buying a houseful of new furniture on credit or taking out a new car loan—that doesn’t impact your score as much as it might when you were younger. Companies that extend credit know that people who have good, long-term financial habits are likely to keep those habits when they retire.

The fact that you probably have less money to spend in retirement than you did when you had a paycheck doesn’t really come into play. As long as you maintain your good payment habits, you should be fine.

Why is a good credit score (and a good credit record) important in retirement?

Even if you don’t intend to charge a lot of everyday purchases on credit cards once you’re retired, you never know when there will be an emergency and you don’t have the cash to cover it. If you have to charge auto repairs or a new heating system and pay it off over several months, you’ll save money if you qualify for a lower interest rate on your credit card. People with better credit scores get those better interest rates.

In addition, many retirees nowadays are picking up part time work to supplement their income. But there’s a lot of competition for jobs nowadays, so many companies are looking at people’s credit reports as one way to do an initial screening. A good credit report is likely to move you up on the list of job candidates.

How can I keep (or improve) my good credit score in retirement?

Maintaining or raising your credit score in retirement requires you to use the same strategies that you would at any other time in life:

• Pay your bills on time. Don’t be late, and don’t skip payments.
• Don’t close out credit card accounts. Although you might be tempted to simplify your life by consolidating all your charges onto one or two cards, this could actually cause you to lose points on your credit score, especially if you’re canceling cards that you’ve held a long time. Remember, companies that extend credit like to see that you’ve held accounts long term. They also like to see that you’re using only a small percentage of the amount of credit that you have. If you close accounts, you’re increasing that ratio of credit used to credit available.
• Keep an eye on your account activity and watch for indications of identity theft. If you don’t already have online access to your credit cards, consider signing up so that you can review charges on a weekly basis. That way, if there is a problem, you’ll be able to take alert the bank quickly and limit the thieves’ ability to steal money or merchandise using your card.
• Don’t retire your financial common sense. You’ve worked hard for decades to enjoy this time of your life, so don’t ruin it by running up bills or spending more than you can afford. Exercising financial discipline will help you maintain a good credit record throughout your golden years.