Your Credit Score Will Influence your Retirement Choices – TheStreet
By Marcia Mantell, RMA
Changes to the financial systems since we were young and starting out never cease to amaze. There are countless new gizmos and gadgets in the financial world every year. Everything from PayPal to ApplePay allow us to buy instantly online or in place of doing the heavy lifting of pulling out a plastic credit card at the coffee shop.
Yet, to take advantage of these changing technologies, you need a good credit score under the hood.
Credit Scores Will Be Used Throughout Retirement
But what if using Venmo and GooglePay aren’t your cup of tea? Perhaps you paid off that car loan during the COVID-19 quarantine? Or did you turn over a new leaf to reduce your credit card use and paid off credit card debt?
All valiant decisions and actions indeed. But as you move into the retirement zone with some 30 years of living yet to go, putting aside your use of credit is not such a good idea.
In an increasingly cash-less world, you aren’t done buying on credit. The fact is, those close to retirement or living in retirement have nearly $500 billion in outstanding credit card debt (as of Q1 2020, Federal Reserve Board of NY). And buying cars is on the rise for the older generations – on credit. Data from Experian reports average auto debt held by generation between 2019 and 2020:
· Gen X (ages 40 – 55): $22,500, up 4%
· Boomers (ages 56 – 74): $19,300, up 3%
· Silent Gen (age 75+): $14,700, up 2%
Furthermore, consider there will continue to be new financial innovations you may want or need in your retirement years. Your access to all kinds of lending and favorable interest rates depends on your current and high credit score.
Securing good credit in your own name is especially important for many older women who have been married for a long time. You may need to take steps now to ensure you have a viable, current credit score. Chances are you’ll make your own financial decisions during a long retirement. And, having a solid financial plan for the possibility of living alone is essential. Every woman needs her own access to credit.
The Evolution of Credit Scoring
Credit scores have only been around in a consistent, algorithmic way for the past 30 years. The Fair Isaac credit reporting bureau was the first to operationalize how lenders evaluate each of us when we need to borrow money. The algorithm assesses the odds that you will pay back your loans on time and outputs your FICO® score.
In 2006, the three big credit reporting agencies (Equifax, Transunion, and Experian) got together to pool their information. The result is a similar assessment of riskiness. Their output is called VantageScore®.
Both tools calculate scores between 300 and 850 and categorize the results as poor, fair, good, very good, or exceptional. There are variances in each of their “secret sauces.” That’s why you get different but similar results.
The key with credit is to fall in the good/very good/exceptional range. Today, the “good” range starts at 670 for FICO and 661 for VantageScore. In the U.S., the average FICO score is 711 and the average VantageScore is 688 (Experian, 2020). Men and women have about the same average score.
Expanding the Inputs
Late payments are the most influential factor in determining your credit score. And it’s not just paying late on credit cards and loans that can create headaches for you. If utility bills, cellphone or internet services, or even Netflix are in your name and you pay late, this is a hit on your credit worthiness.
Same goes if you run into problems paying your health care bills. These types of late payments are sent quickly to collections agencies that report to the credit bureaus.
So, you get penalized for late payments on these contracts, but your good payment history wasn’t included. Until now.
Experian and Transunion now allow you to add these contract services to your credit input. Of course, you need a great track record of paying on time to make this worth the effort.
And don’t get too excited here. Adding your $4.99 streaming service or even your $241.17 cell phone payments to the mix doesn’t stack up against car loans and your mortgage. But this clearly illustrates how the credit bureaus evolve to accommodate the ever-changing money-movement activity that occurs in the billions of transactions per day.
Keeping Up Good Credit throughout Retirement
Retirement is no time to sit back and reflect on your last 30, 40, or 50 years of excellent financial behavior. It’s important to keep up on the latest changes on credit scores and lending access. Here are a few reasons you may need or want access to credit and lending throughout your retirement years:
· Have you bought your last car yet? With the oncoming switch to electric vehicles, you may want to venture into a more eco-friendly option. Or your granddaughter might really need a car… Qualifying for a loan at the lowest interest rates requires a great FICO score.
· Thinking about moving into a retirement community or continuing care housing arrangement? Better have a great credit score to show. Many housing communities require proof of good payment history.
· How about opening a new credit card with better travel rewards now that you’ve got time to travel? Think again. Even though you’ve been at the same institution for 27 years using their credit card does not mean you can just switch over. They’ll be taking a peek at your entire credit history.
· Finally ready and able to buy that second home as a gathering place for your extended family? Securing a mortgage is no easy feat without a great credit score. And those low interest rates that are advertised? Only available to those with the best credit scores.
· Too cold where you live during the winters? It would be great to rent a place along the south coast during the snowiest months of the year. Not so fast. To get long-term rentals at favorable rates, you’ll need to produce a good to excellent credit score.
Ladies, You May Have More to Do
Nearly 70 million women are married in the U.S. today. Many who are entering or living in retirement have been married for 50 years or more. The financial world was much simpler way back then. You didn’t get your own credit cards or loans. Rather, you joined on as an “authorized user” to your husband’s credit.
Well, ladies, it’s time to break away from that ancient model and make sure you have your own footprint in the financial system. It is critical you have one of the most important tools in your financial purse – your own credit score.
There are some 11 million widows and nearly 15 million divorced women in the US (compared to 3.5 million widowers and 10.7 million divorced men). When you find yourself in shock from losing your spouse, you’re going to need options. And you need the right tools readily available so you can make the adjustments you need.
It takes years to build up a credit history and a good credit score.
Steps to Take During Retirement
Between 2019 and 2020 the average FICO scores improved for all generations. Gen Xers went up from 688 to 698, boomers from 731 to 736, and the Silent generation from 757 to 758. That positive direction needs to continue. The financial system will not get simpler as you age.
There are several easy steps you can take every year throughout retirement to keep up your good, very good, and excellent credit. Or, to improve into the “good” zone.
· Pay all credit, loan, services bills on time every month.
· Watch your utilization of credit – keep your borrowing amounts on every credit card to below 30%.
· Do not close old credit cards – simply take the card out of your wallet.
· Stay on top of any medical bills you owe – work with the biller on a payment plan to avoid a collections agency.
· Check your credit history and credit score at least once per year.
Simple steps will keep your doors open for financial needs you will inevitably need throughout retirement.
About the author: Marcia Mantell, RMA®, NSSA®
Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business consultancy. She develops innovative programs, marketing materials, and educational workshops for the financial services industry, advisors, and their clients. She is author of What’s the Deal with Retirement Planning for Women?, What’s the Deal with Social Security for Women?, and blogs at BoomerRetirementBriefs.com.