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FICO Dilemma: A Zero-Debt Retirement is a Worthwhile Goal, but Don’t Let Your Credit Scores Retire When You Do

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Here on the Blog, we often write about the perils of retiring with too much debt. It’s a problem faced by a growing number of retirees, as recent articles like this one attest. But there’s another potential problem that could hamper the plans of retirees who are on the other end of the debt scale: these prudent seniors may fall into the costly trap of using so little credit that their scores actually drop. It’s as if their credit scores had retired at the same time they did.

That, at least, is the point of a recent column by a financial writer we generally appreciate, Liz Weston. We came across her column on this topic in the Seattle Times, but it was originally published in NerdWallet which is Weston’s home publication. Her point is one people seldom stop to consider, namely that, if you stop using credit entirely, you might accidentally be setting yourself up for financial pain in the form of higher insurance premiums, cell phone costs, and interest rates should you need to borrow some day.

The good news: the problem is easily solved, provided you think about it now and don’t wait until the damage is done. Let’s see what Weston advises.

It Takes Data to Generate a Credit Score

Most retirement financial resources agree that getting rid of as much debt as you can before you retire is a positive step. But allowing your credit score to be damaged through inactivity isn’t the best idea. In fact, Weston warns, a “retired” credit score can end up costing you money. 

Weston explains, “People who stop using credit also stop generating enough data to produce credit scores, the three-digit numbers used to gauge creditworthiness. Not having scores can make it harder and more expensive to get loans. Even if you’re sure you’ll never borrow again, lacking credit scores also can make insurance, cell phone plans and security deposits more expensive.” (This earlier NerdWallet article published a few months ago warns against becoming “a credit ghost.” It’s the same idea.)

Does this mean you need to stay mired in debt for the sake of your FICO score? Thankfully, no. But it does suggest that you need to keep using credit in some way, shape, or form, with care.

Debt is Rising, but Millions are “Credit Retired”

The NerdWallet article paints a grim picture of the debt load of U.S. seniors. Compared to generations past, older people in 2023 are more likely to have mortgages, car loans, credit card balances, and other debt well into their retirement years. In fact, according to the Federal Survey of Consumer Finances, the most recent numbers (2019) reflect that 70 percent of households headed by someone age 65 to 74 had debt.

This number is clearly rising over the last few decades. In 1998, that percentage was closer to 51.4 percent for the same age bracket.

“But that still leaves a large population of older people who don’t have debt and may not be actively using credit,” Weston writes. “Leading credit scoring firm FICO has found 7.4 million people are ‘credit retired,’ with good credit histories but no active accounts, says Ethan Dornhelm, FICO’s vice president for scores and predictive analytics. Some were younger people who may have switched to a cash-only lifestyle, but most were older: The median age of the credit retired was 73.”

“Credit Retirement” Doesn’t Take Long

Moreover, this “credit retirement” doesn’t take long to happen. In fact, “the FICO scoring formula used in most lending decisions needs at least one account on someone’s credit report to have been updated in the previous six months,” Dornhelm says.

This timing varies across different scoring companies, however, as Weston explains. Another reporting firm, VantageScore, looks back at least 24 months for account updates, for example.

But many seniors let their accounts lie dormant for far longer than that, says the article. As Dornhelm told Weston, “Among the credit retired, the median length of time since an account was updated was over four years.”

What Retired Credit Could Cost You

“Having a paid-off mortgage and no other debt can be helpful when you’re retired on a fixed income,” Weston writes. “You won’t have to draw down your savings or use your limited income to make debt payments. But maintaining good credit can be helpful if you need to borrow to pay an unexpected expense, finance a late-in-life move or deal with a cash flow crunch, among other situations.”

Credit counselors are quick to advise that life is unpredictable, and few of us can be 100 percent certain that we will never need credit again. Bruce McClary, senior vice president at the National Foundation for Credit Counseling, explains, “A good credit score can provide peace of mind, financial security and flexibility, even if you don’t predict the need for a new loan or credit card account during retirement.”

There are other costs to having a nonexistent credit score, which we’ve listed below verbatim from Weston’s article:

  • In most states, insurers use credit information to set premiums for auto and home insurance.
  • Getting a cell phone plan can be tough with poor or nonexistent credit, and cell phone providers often reserve their best deals for people with good credit scores.
  • Utility companies may demand larger security deposits for people without scores.
  • Senior housing — including assisted living facilities, continuing care retirement communities and even some nursing homes — may require applicants to pass a credit check.

The Simple Solution: A Credit Card (or Two)

So, as we asked above, does all of this mean going back into debt? Fortunately, no. “Using a credit card or two, and paying off the balances in full every month, should suffice,” Weston writes. “Card issuers report payments to the three major credit bureaus — Equifax, Experian and TransUnion — each month, keeping your accounts updated so your reports can continue to generate credit scores.”

She adds, “Try not to charge too much on a card, however, even if you pay in full. Using too much of your credit limit can hurt your scores. The fewer active accounts you have, the more damage you could do.”

And if you’re among the currently credit-retired, it’s not too late to resurrect your credit and get it working for you again. Even being added as an authorized user on someone else’s credit card can be enough to revive your scores.

Another option is a secured credit card, which requires a cash security deposit that’s usually equal to the credit limit you get,” Weston writes. “Finally, some credit unions and online lenders offer credit-builder loans. These loans put the amount you borrow into a savings account that you can tap after you make all the monthly payments.”

The article ends with the words of Jeff Richardson, senior vice president of marketing and communications at VantageScore Solutions. He encourages the responsible use of credit well into your retirement years, saying, “If you continue to have credit activity and a good credit score, you’re in the driver’s seat.”

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(originally reported at www.nerdwallet.com)

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