The main reason credit reports exist is to help potential lenders determine your creditworthiness and gauge how likely you are to repay your debts. They do this by taking a look at your financial history and finding patterns (positive or negative) in your financial behaviour.
Lenders look at things like whether you’ve repaid debts in the past, the timeliness of repayments, and how much debt you currently hold to assess the level of risk they’re taking on if they lend to you.
Now you may be thinking there’s no way you’re going to be applying for a loan again in your lifetime, so you don’t need to worry about your credit score. But it’s not only potential lenders that will check your credit report.
Potential landlords or future employers may also need to see how you handle your finances, and debt collection agencies can use a check to gather more information about you. Here are the reasons you still need good credit in retirement.
1. Reap the benefits of credit cards
Even if you don’t want to borrow money and are planning to repay everything at the end of the month, you may want to sign up for a new credit card that offers desirable perks such as air miles, points, or a generous sign-up bonus.
If you don’t have good credit, your chances of getting approved aren’t great.
It’s also important to keep your credit score high to avoid your current credit cards being changed or cancelled due to a significant drop in creditworthiness.
Tip: even though your age doesn’t have an impact on your credit score, the age of the accounts you hold will. A longer credit history is better than a shorter one, so avoid closing credit accounts you already hold. If you close unused credit cards and your utilisation ratio increases, your credit scores will almost certainly drop.
2. Downsizing or relocating
Have you ever thought about a sea or tree change? How about downsizing to cut the household chores in half?
“More and more homeowners are still making mortgage payments after they retire, and might find themselves in a better position after refinancing,” says Bruce McClary, a spokesperson for the non-profit National Foundation for Credit Counselling.
Unless you can pay cash for your new home, you will need to apply for a mortgage. The better your credit, the better chance you have of qualifying for the lowest mortgage rates.
And if you are contemplating the renting option, most landlords run credit checks to lower the risk for themselves.
3. A new job
You may find yourself at a bit of a loose end after retiring and want to go back to work – or change jobs if you still work part-time. Depending on the sector, some employers run credit checks on potential employees and good credit can make all the difference.
4. Becoming a guarantor
Say a child or grandchild needs a co-signer to take on a debt such as an education loan. Or a family member needs to upgrade their car to fit in an extra little one. If you’re willing to lend a hand, you’ll need good credit to be a guarantor.
Of course, just because you can become a guarantor doesn’t mean you should, check over the facts carefully and ensure you know exactly what you are agreeing to.
Tip: being a guarantor can significantly affect your credit score if the primary borrower fails to pay the loan on time and in full.
5. Unexpected situations
Maybe your just-out-of-warranty fridge breaks down, or you need to install a chair lift at home. Life comes with a lot of expenses, and some of them are a big surprise.
If you’re in a financial bind and don’t want to dip into your savings, or if you simply don’t have the funds, you might need to take out a loan. Having poor credit will cause your loan interest rates to skyrocket, and this is more money taken from out of your pocket.
6. Opening a new account
Businesses such as insurance companies and service providers don’t stop checking your credit after you retire. Purchasing a new phone on a contract, taking out insurance, or opening a new utility bill all come with a credit check and those with bad credit may have to put down a deposit or make larger repayments.
Maintain a good credit score
There is some good news, the act of retirement has no effect on your credit score. Your decision to retire is not stated on your credit report and, unless you decide to tell them, even lenders you currently hold loans with will be none the wiser.
Your repayment patterns and how much debt you hold are the two main factors that influence your credit score. If you have outstanding loans, as long as you stick to your repayment schedule there won’t be a change to your score.
If you don’t have any outstanding loans it can be a bit more difficult to maintain a good score as there’s no activity to keep the score high.
One simple way to keep your record active is by regularly using a credit card and paying the bill on time every month, even if it’s just for a small expense such as filling up the car or a weekly grocery shop.
Thankfully, the recipe for maintaining good credit scores is essentially the same whether you are a young adult or a retiree. If you’ve figured out how to achieve high credit scores prior to retirement, then the odds are pretty good that you can maintain it from now on.
It’s also important to check your credit report often to ensure your details are up to date and the information is correct.
Do you know your credit score? Have you checked your credit report lately?
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