As you approach retirement, it’s natural to start thinking about your financial situation and how you’ll manage your money on a fixed income. However, many people overlook the impact that retirement can have on their credit score.
In fact, there are several surprising ways that retirement can affect your credit score, and mostly negatively.
Now here are a few shocking ways how retirement can lower your credit score.
1. You close unused credit cards
As you prepare for retirement, you may consider simplifying your finances by closing some of the credit cards in your wallet. However, closing one or multiple credit cards can actually negatively affect your credit score.
The reason is that closing a credit card account can reduce your overall available credit, which in turn increases your credit utilization ratio. Credit utilization ratio is a key factor in credit scoring models, and a higher ratio can lower your credit score. Additionally, if you close a credit card that you’ve had for a long time, you may be shortening your credit history, which is another important factor in determining your credit score.
Before closing any credit cards, be strategic and consider how it may impact your credit score. For instance, you may want to keep the credit card that has the longest history or the one with the lowest interest rate.
2. You maintain a high credit card balance
As a retiree, you may have a newfound excitement for travel and adventure, with the opportunity to explore various places that you didn’t have time for before. However, it’s important to remember that such trips can come at a significant cost. Therefore, it’s essential to plan and budget accordingly.
If you choose to pay for your travel expenses with a credit card, be mindful of the interest rate and try to avoid carrying a balance from one month to the next. High-interest rates can quickly add up, resulting in a substantial debt that may be difficult to pay off in retirement. What’s more is that this will increase your credit utilization ratio, which automatically reduces your credit score.
3. You pay off debt
Eliminating debt is an essential part of achieving financial stability before entering retirement. However, it’s important to understand that paying off your debt could have an impact on your credit score. Maintaining a healthy mix of credit types, such as mortgages and credit cards, along with consistent and on-time payments are factors that creditors consider when evaluating your credit score.
When you pay off a debt, it can lead to a reduction in your credit mix, payment history, and credit utilization ratio. These three factors combined make up 60% of your credit score. So, even though paying off your debt is an important goal, it may cause your credit score to drop temporarily.
The best approach is to pay off debt gradually and consistently, without completely eliminating all types of debt at once. Doing so will help you maintain a healthy credit mix and improve your credit utilization ratio, ultimately leading to a better credit score in the long run.
4. You refinance a loan
As a retiree, you may consider refinancing your loans, like your mortgage or car loan, to obtain a lower interest rate, which could result in monthly savings. However, it’s important to note that when you apply for refinancing, the lender will perform a hard inquiry on your credit report, which can impact your credit score.
Additionally, keep in mind that refinancing often comes with fees, such as closing costs or application fees, which may offset the savings from the lower interest rate. Be sure to carefully consider the overall cost and potential savings of refinancing before making a decision.
While refinancing can be a viable option for reducing your monthly expenses, it’s essential to understand how it may affect your credit score and carefully evaluate the costs and benefits before committing to it.
5. You stop using your credit card
During retirement, you may have more opportunities to indulge in new hobbies, travel, and other activities that require spending money. Conversely, you may choose to conserve your funds and relax at home, particularly if you’re anxious about your financial situation with no regular income from work.
However, not spending money at all can be detrimental to your credit score. Credit card issuers may cancel your card if you haven’t used it in a long time, which can negatively impact your credit utilization ratio and credit history. This could make it harder for you to obtain credit in the future.
Potential lenders look at your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit, to determine if you’re a responsible borrower. If you’re not using your credit at all, your credit score could be lowered due to a lack of activity.
Therefore, it’s important to use credit cards occasionally and pay the balance in full each month to show that you’re a responsible borrower. This will keep your accounts active and contribute positively to your credit score.