How Your Credit Score Could Affect Your Retirement Planning
Bills.com suggests ways to improve retirement quality of life with a solid credit score
SAN MATEO, Calif., Jan. 31, 2007 — This year, the oldest Baby Boomers turn 61, meaning that the United States has officially begun the race to Baby-Boomer retirement. With many thousands of Americans retiring each year, and the number expected to grow, Bills.com co-founder and co-CEO Brad Stroh suggests that those entering their "golden years" check their credit scores before giving up their paychecks or moving into their retirement homes. "People considering retirement should remember that their credit scores -- and the creditors that scrutinize it -- will not disappear with the first withdrawals from retirement funds," Stroh said. Credit scores incorporate credit history, amount of credit available and used, number of late and on-time payments, and whether any payments due are in default. Creditors also analyze other factors, including debt and payment history relative to income – one factor sure to change at retirement. Some creditors also consider job history, which ends when an employee leaves full-time employment. Credit scores fall in a range between 300 and 850, with higher numbers indicating a greater likelihood of repaying debt. A score below 680 usually results in a borrower being charged a higher interest rate or denied credit. To maintain a credit score that will make for an enjoyable post-retirement life, Stroh suggests the following:
- Before retirement, focus on investing. Eliminate credit card debt by funneling money previously used to shop, dine out or travel to paying debt, and then into retirement savings. People age 50 and over can contribute $20,500 to a 401(k) plan in 2007, and $5,000 to an individual retirement account or Roth IRA. For people younger than 50, those limits are $15,500 for a 401(k) and $4,000 for an IRA.
- Live on planned retirement income now. Give retirement a "dry run" by living on your anticipated post-retirement income. Consult a financial planner to determine how much income you will require. Meanwhile, use the savings to pay off remaining debt (including credit cards, vehicles and home mortgages).
- Line up insurance. Review insurance needs, including homeowner's, auto, long-term care, umbrella policies and life insurance (which might not even be needed in retirement). If changes are needed, make them while employed. Insurers give their best rates to people with good credit scores, so plan to stay with a policy for a while during the transition to retirement.
- Settle into home and financing. If you plan to move to a smaller home or a condominium, consider moving before retiring. You are likely to receive better mortgage terms with your current income than you will later. The tax deductions associated with a move also might benefit you more while employed. Similarly, for the best terms, open any planned home equity line of credit on a home before retirement.
- Keep the cards. If you plan to streamline finances, think twice about closing old accounts. Credit scores are partly determined by comparing debt to credit available. Closing unused accounts while maintaining some debt results in a likely higher debt-to-credit ratio, which looks like a greater credit risk -- and lowers credit scores.
- Check credit reports now -- and frequently later. Don't retire your vigilance when you retire. Check credit reports at least once a year -- more often if you plan extensive travel, which exposes seniors to greater risk for fraud and identity theft. Free credit reports are available once a year at www.annualcreditreport.com. All three credit reporting agencies (Equifax, Experian and TransUnion) offer credit reports online, as needed.
"Retirement is about relaxation," Stroh said. "Make sure you can make the most of it by securing every aspect of your finances first, starting with your credit score." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 10,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.