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Retirement Assets Go Up and Credit Scores Go Down
You’ve worked hard, saved well, and planned everything out. You’re finally in retirement. Everything is on the up. All except one thing. Your credit score.
When you get to and go through retirement, you’re way less likely to buy a new car, you’ve paid off your mortgage, and wouldn’t dare carry a balance on your credit card. All of these are considered good things, but they can decrease your credit score. Understanding why comes down to the five major credit score factors listed below (from most to least impactful):
- Payment History
• History of on-time payments. Pretty self-explanatory. The fewer missed payments, the better.
- Credit Utilization
• Total credit balances divided by current balances. If you have multiple credit cards that are all maxed out, it’s indicative of someone falling on hard times. Not too great for your credit score calculation. Ideally, you would like to keep utilization <30%. The lower the better.
- Credit History
• The longer the history of having credit, the better. This history not only includes the amount of time credit may have been opened, but the last use of credit as well. In short, credit history shows if someone has experience using credit.
- Credit Mix
• A healthy credit mix includes different types of debt vehicles. To score high in this section, one would need a car loan, credit card(s), student loan, mortgage, etc.. If you can handle different forms of credit, then it shows experience and mastery of credit. Having multiple types of credit open, even if it’s just multiple credit cards, helps with your credit mix as well.
- Recent Credit
• Recent credit primarily refers to hard inquiries on your credit when applying for credit. Hard inquiries directly lower your credit score. Also, multiple hard inquiries from opening multiple forms of credit in a small amount of time are suggestive of someone financially struggling and therefore lowers your credit score.
There may be a time in your retirement when you utilize credit for a large purchase, debt consolidation, or some other reason. When that time comes, you’ll want the highest credit score in order to get the lowest interest rate and save money throughout the life of a loan. What we recommend is simple. Do not close out old credit cards. In fact, you should make it a point to use them, so they don’t get closed out by the bank. Just by using a credit card to buy a cup of coffee, you’ll ensure your credit mix and credit history stay intact by keeping the card open and showing some activity. This also improves the “Recent Credit” category calculation as well. The rest goes without saying. Keep balances as low as possible to keep credit utilization low, and keep making your payments on time. Remember, your credit score is likely to decrease in retirement regardless of taking all the precautions, but you can keep it higher than most by understanding the components of a credit score.
Eric Johnston, CFP® and Robert Jeter, CFP®, CRPC® are Financial Advisors offering Securities and Advisory services through Cetera Advisors, LLC member FINRA, SIPC, a broker/dealer, and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.