Are good credit scores impacted by retirement?

How you may help your clients maintain their credit score

Investors approaching retirement often concentrate much of their focus on accumulating wealth and preserving their assets. As a result, their credit score may not be one of their top concerns, but a growing number of retirees are finding that their once-peerless credit scores are taking a hit once they enter retirement, even if they have a strong credit history.

"...credit scores may have an impact beyond your ability to receive a loan."

It can seem like a bit of a paradox — retirees are typically less likely to apply for mortgages and loans. But according to a recent article in The Wall Street Journal, even though credit scores don’t take things like employment into account, taking actions like closing credit accounts could cause a drop. If fact, if retirees have already paid off mortgages and auto loans, they may get dinged for that as well.

It can be hard to pin down the exact reason why, but the WSJ cites data from the credit bureau TransUnion revealing consistent dips in credit scores among people 80 and older. Let’s take a closer look at the phenomenon, how it may impact retirement, and what financial professionals may be able to do to help.

Do credit scores matter in retirement?

If credit scores tend to worsen in retirement, is that even such a big deal? Beyond the pride of having a high score, the conventional wisdom is that retirees may be less likely to borrow money than their younger counterparts. However, credit scores may have an impact beyond your ability to receive a loan.

According to recent findings from Forbes Advisor, 46 states allow credit as a pricing factor when it comes to auto insurance. And in fact, those with poor credit have an average rate increase of 76% — nearly $1,180 each year.

"The easiest way retirees may maintain a high credit score is simple- keep their account active..."

“If you’re paying auto insurance or homeowners insurance, they may look at your credit report to generate a score which helps decide what rate to charge you,” says Carla Urbaszewski, an Assistant Vice President on Global Atlantic's Advanced Markets team. “So if you have a low credit score you might end up paying more for car insurance or homeowners’ insurance, which can matter to a retiree’s budget.”

Maintaining a good credit score can be more than just a point of pride, too. Urbaszewski says that there are plenty of variables that could come into play to make retirees happy they’ve got a high score.

“Life is unpredictable,” she says. “You shouldn’t assume that you wouldn’t need credit again. A good credit score can give someone peace of mind during retirement if the need for an unexpected loan comes up.”

Why credit scores dip in retirement

The simplest reason why retirees might see their credit score drop is that older adults tend to carry less debt. As of 2019, approximately 30% of households lead by someone between 65 and 74 years old carried no debt, according to the Survey of Consumer Finances. Being so-called “credit retired” can impact your credit score because the formula used by some organizations to calculate scores needs an account to updated at least once in the previous six months, NerdWallet reports.

“Some people dial back their credit usage,” Urbaszewski says. “Their mortgage might be paid off; they don’t have to replace their car as often and their spending might be winding down so their debt is going down. And using credit is one of the factors that keeps your credit score up.”

It’s important to remember, however, that credit bureaus do not consider your source of income when determining your credit score, according to Urbaszewski. Here’s a closer look:

• Credit bureaus won’t check to see if you’ve substituted your regular paychecks with Social Security checks.
• Credit bureaus will look to see whether your income meets your monthly expenses.
• Income doesn’t have to be a salary. It could come from Social Security, a pension, 401(k), savings, rents, stocks, bonds and other investments.

What can be done to prevent it?

The easiest way retirees may maintain a high credit score is simple — keep their account active. Even if they can make purchases with cash, it might make sense for them to make a few charges to their credit card each month, assuming they have no problem making the payments. Not only will this behavior buoy their credit scores, but they may be able to reap the benefits of rewards points associated with many credit cards.

“Take an idle credit card and use it to pay for a small, recurring monthly charge that they have and set it on autopay, so they don’t have to remember to do it. It could be lawn service, streaming service, or cellphone bill.”

How financial professionals may help

As a financial professional, you’re in a unique position to help your clients navigate these challenges as they enter retirement. By speaking with your clients about how they envision their future, you may determine whether it’s important to focus a conversation about their credit scores.

“Talk to your clients about their future plans — do they plan on having a second home or a vacation rental — they might be looking to get a mortgage,” Urbaszewski says. “Knowing what their plans are in retirement and if they’re looking to make some big purchases may help determine how to prioritize their credit score in retirement.”