Improve Your Credit Rating as You Head Toward Retirement
February 12, 2015 | Your Finances
When you think about your retirement, you are probably focused on meeting savings goals. But are you keeping a close eye on your credit rating? It can make a difference. A good credit rating can give you greater flexibility as you enter retirement.
If you are not carrying debt into retirement, you are in better shape than a growing number of Americans. If you do have debt or a low credit rating, you should work to improve that before you retire.
“We counsel a lot of people who find themselves carrying large debt or having a low credit rating coming out of years when they were helping their children through school or using credit cards or home equity loans to get through bad times,” said April Lewis of Consumer Credit Counselors of Fort Lauderdale, Florida. “It’s really important to get their credit rating in line before they retire because many will be living on fixed incomes, and a bad credit rating can really limit their options.”
What a Good Credit Rating Can Get You
A good credit rating is like an extra chip on your side at a time when you are moving to living on fixed income from your retirement savings. Not only can it give you some possible savings; it can give you more flexibility when you may need it most. Here are some of the benefits:
1. Cheaper insurance rates. Car and homeowner’s insurance plans use credit ratings to set premium prices. A low credit rating typically means you get charged more than those with better credit scores.
2. Access to credit and better interest rates. A good credit rating gives you a better chance at accessing credit and good interest rates. You’ll have an easier time refinancing a mortgage for a better interest rate or negotiating a better credit card interest rate if you do have balances. Lewis also says if you are looking to start a small business in retirement and plan to finance it, a bad credit rating could stymie your plans.
3. Rentals. Landlords also look at credit ratings when deciding to whom they should rent.
4. Job prospects. If you decide you want to work part time during retirement, a bad credit rating could turn prospective employers off. Lewis says in recent years even retail outlets have begun checking credit ratings of prospective employees to weed out people they fear may be risky.
How to Improve and Maintain Good Credit
Lewis and her colleagues at Consolidated Credit advise people to double down on getting their debt and credit rating in good standing five to ten years before they expect to retire. “It can take time to pay things down or to negotiate consolidation and get on solid footing again,” says Lewis. “For those headed toward a fixed income lifestyle, the pressure is on to lessen the financial burdens.” Experts point out that having debt during retirement may not have been factored into your savings plans, leaving you with less money to live off.
Here are expert do’s and don’ts for bettering a credit rating:
1. Check and correct. Check your credit rating once a year and check for identity fraud. Lewis says you’ll want to promptly correct any inaccuracies you find. There are three agencies in the U.S. to check, and you can get a free check each year online at annualcreditreport.com.
2. Pay down debt consistently. If you have a low credit score for late or non-payments, Lewis says you can start to see improvement within six months of making on-time payments. She suggests setting a payment plan that helps you pay down your highest interest debt first and maintain minimums on others. Consolidated Credit has a credit card calculator to help you figure out how adjusting payments can lessen the interest you pay and how long it will take to pay off.
3. Negotiate debt. If you are carrying a lot of debt, Lewis points out you may be able to negotiate a consolidation or better interest rates.
Cautions While Seeking Good Credit Rating
1. Avoid using retirement savings. Experts caution against taking out loans against retirement savings or cashing them in early to pay down credit card, medical or student loan debt. Most retirement accounts should be earning interest; if you turn to this money first to pay debt, you could be losing out on future income.
2. Don’t be quick to cancel. It’s not always smart to cancel credit cards, especially if you aren’t carrying a balance. Credit that is available to you that you are not using can actually buoy your credit rating.
3. Don’t stop saving for retirement. While paying down your debt, experts say it is important for those heading toward retirement to continue to save. Northwestern Mutual has a calculator that can help you assess where your funds may be best used.
4. Be wary of debt scams. Some debt settlement services may lead to more problems. If you seek help for debt consolidation, use a trusted credit counselor. The federal government offers links to find those with good reputations.
Preparing for your golden years can seem overwhelming, especially for those with debt, but if you take the right steps, you can get yourself on track. Lewis points out, “It takes planning and follow-through; but once you get started you can see some results, and the horizon just opens up.”