You might think that once you reach retirement, your credit score is just one of those things you get to stop worrying about. While it’s true that most retirees won’t be applying for mortgages, it’s not true that you don’t need to maintain a decent credit score. What if you want to apply for a car loan? What about credit cards? You certainly won’t get the lowest interest rates and best rewards programs possible without a good credit score to back you up.
A low credit score can also hurt you if you want to downsize to an apartment, or even move into a senior living facility. You might need a solid credit score to qualify.
Why it’s hard for retirees to build credit
According to FICO, to have a credit score, you must have at least one credit account that is at least six months old. You must also have at least one account that has been updated by a creditor or lender during the last six months.
If you aren’t paying a mortgage, paying off an auto loan, or using credit cards, you might not meet any of these requirements. This might lead to you becoming what FICO calls an “unscorable,” a consumer who has no credit score at all.
Fortunately, there are ways for retirees to continue building credit. They require the same good financial habits you’ve been practicing before retirement.
Use the credit cards you have
You might prefer paying for items in cash. Instead, make small purchases throughout the month with your credit card. If you pay off your entire card balance each month, you’ll continue to boost your credit score.
Make sure that you don’t charge more than you can pay off by the due date. If you do, you’ll be stuck paying interest.
Never pay late. If you pay your credit card 30 days or more late, your card provider will report your payment as late to the national credit bureaus of TransUnion, Experian, and Equifax. This will cause your credit score to plummet.
Keep unused credit card accounts open
You might have a credit card that you never use, but don’t close it. Having open credit card accounts helps your credit score, thanks to something called a credit utilization ratio.
This ratio measures your credit card balances against your total available credit limits, and it accounts for 30 percent of your score. Using too much of your available credit will cause your score to drop, while using a modest amount will help it rise. It’s typically recommended that you not let debt tip this ratio beyond 30 percent. If you have a paid-off credit card that isn’t getting much use, closing it will lower your overall available credit limit and your utilization ratio will then increase.
So, keep those unused cards tucked in your wallet. Having that extra credit that you’re not using will provide a boost to your score.
Apply for a secured credit card
If you no longer have any credit cards, and you’ve become an unscorable, you can still build your credit. Your first step should be applying for a secured credit card.
You don’t need a credit score to qualify for one of these cards. Their line of credit is based on the amount of money you deposit into an account with the financial institution issuing the card.
If you deposit $1,000 into an account, you can then charge up to $1,000 on your secured credit card. Every time you use your secured card and pay off these charges on time, you’ll get a boost to your credit score. Do this long enough, and you can build a score that’s high enough to qualify for a traditional credit card.
Again, take the same precautions you’d take with a traditional credit card. Pay your bill on time each month, and never charge more than you can afford to pay in full by your due date.