Can Retirement Affect Your Credit Score?

Ezra Summers

June 28, 2023

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Can Retirement Affect Your Credit Score?

Retirement is a time for relaxation, for hobbies, for travel – not for stressing over credit scores. But hang on! Don’t toss those credit reports out with your work clothes just yet.

As you embark on the exciting chapter of retirement, it’s essential to understand how your financial decisions can impact your credit score. While retirement itself does not directly affect your credit score, certain activities during this phase can have both positive and negative implications.

Table of Content

Why You Should You Care About Your Credit Score
How Retirement Activities Affect Your Credit Score
Paying Off Debt
Making Late Payments
Refinancing

Why You Should You Care About Your Credit Score

Isn’t having good credit just for folks needing a mortgage or car loan? Well, not exactly. Even when the 9-to-5 is behind you, maintaining a healthy credit score can be just as important as ever.

Good credit can potentially lower insurance premiums, help you avoid utility deposits, and, yes, help if you decide to refinance your home or get a loan. It’s like a financial Swiss army knife – handy in ways you might not expect.

You can keep an eye on your credit score by requesting a free credit report annually from each of the three major credit bureaus:

You can check your score any time with Credit Karma, a personal finance company that offers free credit score checks and provides insights into your credit history without dinging your credit. The site makes soft inquiries, which is the inquiry type that when you check your credit score or a company checks your credit for a pre-approved offer.

How Retirement Activities Affect Your Credit Score

1. Taking Out a Loan

Even in retirement, you may find yourself needing a loan for various reasons. Maybe you want to start a small business, renovate your home, or buy a new car. When you apply for a loan, the lender typically reviews your credit history and score to assess your creditworthiness.

To do so, they perform a hard inquiry, which can lower your score temporarily by a few points. They usually stay on your report for two years.

Taking on new debt can impact your credit score in the following ways:

Credit Utilization: The amount of credit you use compared to your available credit plays a significant role in determining your credit score. Taking out a loan increases your credit utilization ratio, which may temporarily lower your credit score. However, responsible repayment can mitigate this impact over time.
Payment History: Making timely loan payments contributes positively to your credit score. Consistently paying your loan installments on time showcases your financial responsibility, reinforcing your creditworthiness.

On the bright side, diversifying your credit mix – having different types of credit like a mortgage, credit card, and auto loan – can help boost your score in the long run.

2. Paying Off Debt

You may have grand plans to enter retirement debt-free. Paying off your debts can certainly relieve financial stress. However, bear in mind that credit scores are partially based on your credit utilization ratio, meaning the amount of credit you’re using compared to your total available credit.

Closing credit card accounts or paying off a loan might lower your available credit and inadvertently increase your credit utilization ratio, which could ding your credit score. While being debt-free is an admirable goal, it’s crucial to understand the potential impact on your credit score:

Credit Mix: Your credit score considers the types of credit you have, including credit cards, mortgages, and loans. Paying off debts can reduce your credit mix diversity, potentially affecting your credit score. However, this impact is generally minor compared to other credit score factors.
Length of Credit History: Closing old credit accounts after paying off debts may shorten your credit history. Since credit history length affects your credit score, maintaining open and active accounts with positive payment history can help preserve your creditworthiness.

Common Methods for Paying Off Debt

Method	Description	Best For
Debt Snowball	List all debts from smallest to largest by amount, regardless of interest rate. Pay minimums on all debts except the smallest, and throw as much money as possible at the smallest debt. Once it’s paid off, apply its payment to the next smallest debt, and so on.	People who are motivated by quick wins.
Debt Avalanche	List all debts from highest to lowest by interest rate, regardless of amount owed. Pay minimums on all debts except the one with the highest interest rate, and put as much money as possible toward the highest-interest debt. Once it’s paid off, apply its payment to the debt with the next highest interest rate, and so on.	People who want to minimize the amount of interest they’ll pay over time.
Debt Consolidation	Consolidate multiple debts into a single debt, usually with a lower interest rate and/or a longer repayment term. This could be done through a personal loan, a balance transfer credit card, or a home equity loan.	People with good credit who can qualify for a lower interest rate.
Debt Management Plan (DMP)	Work with a credit counseling agency to set up a repayment plan that might include lower interest rates or waived fees. You make one monthly payment to the agency, which then pays your creditors.	People who need a structured plan and professional guidance.
Bankruptcy	Legal process that discharges some or all of your debts. Chapter 7 bankruptcy liquidates certain assets to pay off as much debt as possible, while Chapter 13 bankruptcy sets up a three- to five-year repayment plan.	People with overwhelming debt loads and no feasible way to pay them off. Note that bankruptcy should typically be considered a last resort due to its long-term effect on your credit.

3. Making Late Payments

Retirement is a big shift, and things like bill payments can slip through the cracks. Be cautious, though! Your payment history is a significant factor in your credit score. Even one late payment on a credit card or loan can negatively impact your credit score and stay on your credit report for up to seven years.

Payment history is the most significant factor in determining your credit score. Late payments, even if accidental or due to oversight, can significantly lower your credit score. It’s important to prioritize timely payments to protect your creditworthiness.

Here are several apps designed to help you keep track of your bills, which should make remembering to pay them on time much easier:

Mint is a popular financial app offering various features, including bill tracking. It allows you to see all your bills and due dates in one place, set reminders for due dates, and monitor your spending.
Prism organizes all your bills in one place, sends due date reminders, and allows you to schedule payments or pay immediately through the app itself.
PocketGuard links to your financial accounts and helps you track spending, create a budget, and, most notably, for your needs, keep track of all your bills.
Money Lover isn’t just a bill reminder app; it’s a complete money management tool. However, its bill reminder system is top-notch. It sends notifications to remind you of upcoming payments.
Available for iOS, Chronicle is a bill management tool that reminds you to pay your bills, tracks your payment history, and predicts your future bills based on previous data.

Maintaining a consistent payment history is crucial throughout retirement. Automating your payments can help ensure you pay your bills on time, every time.

4. Refinancing

Are you considering refinancing your mortgage to take advantage of lower interest rates? That can be a great move, but remember that refinancing involves a hard inquiry on your credit report, which might lower your credit score by a few points. Here’s how refinancing can impact your credit score:

Credit Inquiries: When you apply for a refinancing loan, the lender will perform a credit inquiry, which can slightly lower your credit score. However, multiple inquiries for the same purpose within a short period are typically treated as a single inquiry to mitigate negative impacts.
Credit Utilization: Refinancing can affect your credit utilization ratio if you close existing credit accounts. It’s essential to carefully consider the impact on credit utilization before making any decisions.

However, the impact usually diminishes over time, and if refinancing helps you meet your financial goals, it could be worth the temporary dip.