For anyone who is approaching retirement age or who will be living on a fixed income, credit card debt and other credit struggles can put a real damper on your golden years. But that is the reality for a good portion of older Americans today, and not because they are splurging on trips abroad or rounds of golf. A recent AARP survey reports that nearly half (47%) of adults ages 50 and older who carry credit card debt said they used their cards to pay for basic living expenses.
Dealing with credit trouble when you’re living on Social Security and other fixed retirement income can make it hard to have a secure financial future. Plus, it’s not always easy to plan for retirement expenses once you factor in potentially higher healthcare costs, long-term care needs, and other unknowns.
Developing some healthy credit habits as you approach retirement can help put you in a better financial position so you can enjoy your retirement. Start with these strategies.
Practice living on a fixed income before you retire
Don’t wait until you stop receiving a paycheck to try out a new retirement budget. Try transitioning to living on what your future retirement income will be several months before you stop working. Not only will it help you have a smoother entry into retirement, but you can use those extra funds to improve your situation even more, by either reducing existing debt or fortifying your emergency fund.
If your practice run reveals that it’s going to be too difficult to live on less, you’ll have time to explore other options such as downsizing to a smaller residence or relocating to a lower-cost area.
Knock out existing debt
The best way to manage credit card debt in retirement is to not have any. But if you are currently dealing with some nagging balances, paying them down as much as possible should be a top goal. If you have non-retirement assets you can sell, that could be a good way to pay a large chunk. Or, perhaps you can have a garage sale or sell items online to bring in some extra cash to help with your goal. Don’t use money that’s earmarked for retirement or deplete your entire emergency fund, though, because that will leave you less financially secure.
For any remaining debt, work on a slow and steady payoff plan. Put all of your extra money toward tackling the account with the highest interest while paying just the minimums on your other accounts. Or, knock out the smallest balance first and work your way up to achieve quick victories along the way.
➤ FREE TOOL:Credit card payoff calculator
Keep tabs on credit health
The last thing you need when you retire is an identity theft incident or error on your credit report to cause havoc. Get in the habit of pulling your free credit reports a few times throughout the year via annualcreditreport.com, including setting up calendar reminders so you don’t forget. Studies have shown that older people are more vulnerable to fraud as well, so it’s also important to monitor your credit and banking accounts regularly to catch any suspicious activity. Consider setting up account alerts that notify you when new transactions are posted.
➤ SEE MORE:5 common credit report errors and how to fix them
Automate payments to protect your credit
Setting up automated payments for at least the minimum amount due can prevent you from accidentally paying late or missing a payment. As you get older, due dates could slip your mind, or perhaps a minor illness might put you out of commission for a few days when bills are due. Later in life, it’s also worth considering having an adult child or someone close to you as a backup to help manage your finances, even taking the step of setting up a power of attorney.
➤ SEE MORE:Why payment history is such an important part of your credit score
Use mostly cash, but get rewards for any credit spending you do
As you’re paying off debt, you don’t want to create more of it. Try to switch to a cash lifestyle for a while. Once you are debt-free, that’s when you can maximize credit cards to earn rewards and cash back. The key is to make sure you make payments in full each month so you don’t pay any interest. Some retirees put all of their expenses on cards, pay them in full, and end up earning enough rewards to book free flights or hotel stays.
➤ SEE MORE:How to pay off debt and use your credit card at the same time
Apply for any new credit you might want before you retire
Keep in mind that even if you have a great credit score, lenders and creditors look carefully at your income (and your debt-to-income ratio). If your income is going to be decreasing in retirement, it could be more challenging to get approved for new credit. Therefore, if you’ve been considering a new travel rewards card, or want to request an increase to your credit limit, you should request those things before you stop working to improve your chances of getting approved.
Don’t let your generosity get you in trouble
If you’re in the financial position to help your children or grandchildren financially, that’s a wonderful gesture. But be wary about co-signing any loans for them. Even if they have the best intention to pay, if they get into a bind, it’s your credit score that will be damaged unless you take up the payments.
Frequently asked questions
Does a good credit score matter in retirement?
The truth is though it might not matter as much as it did in your prime borrowing years, it’s still important to learn how to protect your credit during retirement. Maintaining healthy credit could be important if you want to refinance your home to pay for renovations that can accommodate aging, for example. Plus, credit scores can also impact insurance rates.
How does credit score affect retirement planning?
It’s always a good idea to know where you stand credit-wise, but especially if you’re in the midst of financially planning for a new stage of life like retirement. The higher your credit score, the more access you’ll have to products and services with favorable terms and rates. The best way to maintain a strong score is to make all bill payments on time, and keep your debt balances low relative to your total credit limit.
➤ SEE MORE:How much of your credit should you use?
