Retirement may represent a fresh episode of your life, but a surprising twist might be a drop in your credit score. Even if borrowing isn’t on your agenda, your credit score could affect other aspects of your life, ranging from how much you pay for auto insurance to whether you’ll be admitted to an assisted-living facility.
Average credit scores tend to increase as consumers get older, peaking in their seventies. To understand why your own credit score might drop after you retire, it’s important to know how credit scores are computed. While your history of paying on time is the largest element of your score, other factors include the amount you owe on your credit cards as a proportion of your card limits (known as your credit-utilization ratio) and the length of your credit history, says Ted Rossman, senior industry analyst at Bankrate.com. In addition, if you don’t use a credit card, the issuer may close it because of inactivity. “Retirees’ credit scores often go down because they’re not using credit as actively as when they were younger,” he says.
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FICO Score By Age| Age | Average Score |
|---|
| 18-29 | 679 |
| 30-39 | 692 |
| 40-49 | 706 |
| 50-59 | 724 |
| 60-69 | 747 |
| 70-79 | 762 |
| 80+ | 756 |
Polish your credit
To keep your score in good shape, use a credit card to make small, regular purchases. This approach will ensure that your credit card remains active and contributes positively to your credit score, Rossman says. Diligently pay the bills on time because that’s the most powerful weapon in your credit score arsenal. On-time payments demonstrate financial responsibility and reliability, which are highly regarded by credit scoring models.
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Think twice before closing old or unused credit card accounts. While this may seem like a tidy financial move, it can lead to reduced available credit and an unfavorable credit-utilization ratio, which can have a negative impact on your credit score. You should also think twice about cosigning a loan for a friend or family member. Even if you aren’t the main financier, any late or missed payments can be tied to you as a cosigner, which could tarnish your otherwise stellar credit score.
Finally, make sure your score isn’t damaged unjustly by errors or identity theft. Keep an eye out for any discrepancies or suspicious activities — say, a credit card account in your name that you never opened — that may have crept into your credit history and hurt your score.
Review your credit score
Through 2023, you can review your credit reports from the three major credit bureaus — Equifax, Experian and Trans-Union — once a week for free by going to AnnualCreditReport.com. If you find an error on your reports, file a dispute with the credit-reporting companies. The Consumer Financial Protection Bureau provides instructions and a template letter you can use: How Do I Dispute An Error On My Credit Report?
AnnualCreditReport.com doesn’t provide credit scores, but there are several ways to get a free score. Visit MyFICO.com/free to check and monitor your score, based on data drawn from Equifax, for free. Plus, your bank or credit card issuer may provide you with regular score updates.
Alternatively, you can use a service such as Credit Karma, which offers VantageScore credit scores from your Equifax and TransUnion reports, or Experian’s FreeCreditScore.com, which provides a FICO score based on Experian report data.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you makehere.
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FAQs
While retiring doesn't automatically affect your overall credit score, how you manage your money once retired can. It can also affect your ability to borrow, so having a solid plan for your finances in retirement is a must.
How does retirement affect your credit score? ›
Whether you're starting retirement with a good credit score or with one that could use some improvement, retirement does not directly affect your credit score. However, it's important to maintain good credit throughout your life, even if it may be slightly harder to do so without an income from a job.
How does withdrawing from retirement affect credit score? ›
Taking money from your 401(k) via a loan or a withdrawal doesn't affect your credit. Taking money from your IRA or other retirement accounts has no bearing on your credit or credit score, either.
Is it hard to get credit when retired? ›
Credit card issuers look at your income when considering your credit application to determine whether you're likely to be able to pay back any money you borrow. This doesn't change once you retire. Fortunately, a salary from a 9-to-5 job isn't the only thing that counts.
What are 4 ways you can hurt your credit score? ›
5 Things That May Hurt Your Credit Scores
- Making a late payment.
- Having a high debt to credit utilization ratio.
- Applying for a lot of credit at once.
- Closing a credit card account.
- Stopping your credit-related activities for an extended period.
Most lenders consider pension, Social Security and investment income as your regular income. You may also be able to include your annuity, survivor or spousal benefits and retirement account income as long as you can prove it'll continue for at least 3 years. Your assets can contribute to your ability to get a loan.
How to check credit score for retirement? ›
Protection from identity theft
You can get free weekly credit reports from the three nationwide credit reporting agencies — TransUnion, Equifax and Experian — from annualcreditreport.com.
Does retirement withdrawal count as income? ›
Once you start withdrawing from your traditional 401(k), your withdrawals are usually taxed as ordinary taxable income. That said, you'll report the taxable part of your distribution directly on your Form 1040 for any tax year that you make a distribution.
What is the 4% rule for retirement withdrawals? ›
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
Is it a good idea to withdraw from retirement account? ›
“As a general rule, dipping into your retirement funds to cover a short-term need could end up costing you more in the long run. If it's possible, I'd encourage you to consider other ways to access cash that could be more beneficial to your long- and short-term financial goals,” Feist says.
Being retired won't necessarily stand in the way of you taking out a credit card. If you have a regular monthly income and a good credit history, you may be accepted, depending on the lender's criteria.
Do most retirees have debt? ›
But for a growing number of older adults, debt has become an unwelcome traveling companion. According to the Survey of Consumer Finances, the number of households headed by adults ages 65 or older with any debt rose from 41.5% in 1992 to 60% in 2016.
Do retirement accounts show up on credit report? ›
But the credit report leaves out some important data: According to Experian, "information about assets such as checking account balances, savings account balances, certificates of deposit, individual retirement accounts, stocks, bonds or other investments" are not listed in your credit profile.
What hurts credit score the most? ›
1. Payment History: 35% Making debt payments on time every month benefits your credit scores more than any other single factor—and just one payment made 30 days late can do significant harm to your scores. An account sent to collections, a foreclosure or a bankruptcy can have even deeper, longer-lasting consequences.
What has the largest impact on your credit score? ›
Payment history is the most important factor in maintaining a higher credit score as it accounts for 35% of your FICO Score. FICO considers your payment history as the leading predictor of whether you'll pay future debt on time.
Is there a way to check your credit score without hurting it? ›
A soft credit inquiry, also called a soft credit check or soft pull, is usually done by you or another authorized person, like an employer. Soft credit inquiries don't affect your credit score because you're not actually applying for credit, and these types of inquiries don't necessarily require your permission.
Does turning 65 lower your credit score? ›
Retirement doesn't affect your credit scores directly, but how you manage your finances during retirement can impact your credit and borrowing power.
Is it good to be debt free when you retire? ›
Though total elimination isn't necessarily necessary, some debts like those from credit cards should be taken care of prior to retiring due to their high-interest rates – conversely, holding a mortgage or other low-interest rate type loans are likely better options for long-term investments when managed carefully ...
Does 401k count towards credit score? ›
Unlike other loans, 401(k) loans generally don't require a credit check and do not affect a borrower's credit scores. You'll typically be required to repay what you've borrowed, plus interest, within five years. Most 401(k) plans allow you to borrow up to 50% of your vested account balance, but no more than $50,000.
