After decades of working hard and saving money, retirement can bring about major changes for your finances. One potential change is a drop in your credit score.
To be clear, retirement doesn't directly impact your credit score. But other financial factors — like whether you take out a car loan or still have a mortgage — can, and those factors often change once you're in retirement.
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Why your credit score can drop in retirement
Paying off a mortgage, auto loan or similar financial product can reduce your credit score. That’s because it reduces your credit mix, which refers to how many loans and lines of credit you have under your name. If you simplify your finances by closing old credit cards, your score can also take a hit since it impacts your credit history.
If a retiree finds that because they have a smaller income, they are leaning more on credit cards (potentially while waiting for Social Security), they may see their credit utilization ratio increase. A higher ratio can decrease your credit score.
5 ways to stop the bleeding
There are moves you can make to help give your credit score a boost.
- Make required payments automatic: Payment history is a major factor affecting your credit score, and this strategy ensures you do not miss payments.
- Keep credit utilization low: Use your savings and other income sources when appropriate to avoid credit card debt. A low credit utilization is another important component of your credit score.
- Do not close old no-fee credit cards: Keeping old cards open can improve your credit history, which generally translates into a higher credit score. However, it’s worth closing some cards to minimize fraud risk, prevent overspending and eliminate annual fees.
- Build a retirement cash-flow calendar: Calculate how much you will earn from Social Security, portfolio withdrawals, a pension and other income sources to ensure you do not overspend. Overspending risks a high credit utilization ratio and missed payments.
- Check credit reports for errors or fraud: You can review a free copy of your credit report weekly via the three major credit bureaus. If you find an error, immediately report it.
Where You Can Fix Your Credit Right Now
What not to panic about — and when to act fast
A small dip in your credit score is no reason to panic, especially if you do not plan to borrow, refinance, move, buy a car or apply for credit anytime soon. Lenders, landlords, utility providers and insurers in some states will review your credit score so it’s best to maintain a good credit score for these groups.
However, it’s just as important to assess why your credit score is dropping. For instance, your credit score may drop because you’ve paid off your mortgage, which isn't a cause for alarm. But a lower credit score becomes a problem if late payments and a high credit card balance are the main reasons your score has dipped, since that could be an ongoing behavior. Then, it becomes important to fix your credit score by making on-time payments and getting out of credit card debt. The same goes for identify theft that has allowed someone else to take out loans in your name.
