Many people feel that their credit score is only relevant when they apply for a new charge account. But its significance goes far beyond that. Today, credit scores are used not just to approve your application for a line of credit, they are also used to determine the interest rate you’ll be charged. And they’ve become integral to other elements of financial life, too.
While the maintenance of a good credit score is important to your daily ’round, it is critical to your future—specifically, your retirement saving plans.
6 Ways Your Credit Score Impacts Retirement
Here are six ways that your credit score affects you now and could affect your retirement down the road:
1. Mortgage Interest Rates. While buyers with average credit will still be approved for a mortgage, maintaining a high credit score will allow you to qualify for the best interest rates. And if rates drop, only those with sterling scores will be able to benefit from refinancing. Ultimately, a higher mortgage payment will detract from your retirement savings.
2. Car Loan Rates. As with mortgages, those with lower credit will not qualify for the lowest interest rates on car loans. If you take out an auto loan throughout your working years, the additional interest paid will also reduce the amount that you are able to contribute to your retirement savings.
3. Credit Card Interest Rates. That APR on your piece of plastic isn’t set in stone. These days, most banks offer a range of interest rates for each credit card, and the rate varies, based on the applicant’s creditworthiness. Again, more interest paid equals less money available for retirement.
4. Insurance Premiums. Did you know that insurers are taking into account applicant’s credit scores when determining homeowner insurance rates? Their reasoning is based on a correlation between higher claims and poor credit scores. Although many people disagree with using credit scores for purposes that have nothing to do with borrowing money, this practice is common and legal in most states.
5. Employment. Corporations are increasingly running credit checks on job applicants before making a hiring decision, to determine how financially responsible they are; sometimes, “security” is used as the excuse. Of course, being turned down for a new job can impact your chance to increase your income, while being unemployed for an extended period can be harmful to your retirement savings.
6. House or Apartment Rental. Maintaining a high credit score is critical to having your rental application approved. Without a high credit score, you may still be able find a property willing to rent to you, but you will almost certainly be charged more or be asked for a higher deposit.
Should You Use Credit Cards During Retirement?
A key thing that impacts your credit score is your credit cards: number of accounts, size of credit lines, payment history and size of outstanding balances. For retired individuals, credit cards pose an even greater challenge, as both the risks and rewards of using them are exaggerated.
Advantages of Credit Cards During Retirement
Like all credit card users, retirees can benefit from many of the features that come standard with almost all credit cards. These benefits include purchase protections and travel insurance policies, as well as the ability to challenge charges for goods and services not received. In addition, credit card rewards are frequently offered in the form of cash back or loyalty points that can be worth 2% of each dollar spent or even more. For many retirees, using airline reward cards to earn frequent flier miles is an excellent way save money on travel.
Another benefit to having and using credit cards is that they help maintain the card holder’s credit score. Part of the formula that makes up your credit score is your credit utilization ratio: how close to the limit your balances are—how much of the available credit on your cards you’re actually using. It seems counter-intuitive, but having more credit cards will boost your credit score, as long as they’re not maxed out. A greater amount of available credit means that your utilization ratio is lower that it would be with fewer cards and lower limits.
Drawbacks of Using a Credit Card During Retirement
None of the above benefits is worth the exorbitant price of interest on credit card debt. If a retiree does not pay his or her entire balance in full and on time, he or she will be responsible for interest payments on all purchases from the moment of the transaction up until payment is credited.
Retirees are just a susceptible as other people to the temptation to incur excess debt. But while most workers can hope that they will see a pay increase over time, a retired card holder is likely to be on a fixed income. Dipping into retirement savings in order to pay off debt will further decrease the long-term payout of hard-earned accounts.
Best Credit Card Choice for Retirement
That depends on you. Like any tool, credit cards can be used for good purposes or can impose serious dangers.
Since credit card habits tend to be lifelong, those who use their cards for ongoing financing—and have had difficulty reducing their overall debt—should not continue to use credit cards in retirement. Conversely, those who have been able to use their cards strictly as a substitute for cash, paying off balances in full each month, may safely continue to enjoy the benefits of credit card use during their retirement.