Why Credit Scores Tend to Decline in Retirement
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Here's your Money Briefing for Monday, July 24th. I'm J.R. Whelan for The Wall Street Journal. We often talk about ways that workers can boost their credit scores. But once they leave the workforce, their credit score is likely to decline.
Once you're in retirement, you're less likely to do things like buy a new car and have an auto loan, and you probably paid off your mortgage years ago. So just based on the fact that you have fewer kinds of debt, that may hurt your score.
We'll talk to Wall Street Journal personal finance reporter Amani Moise about why maintaining a high credit score is important to some retirees. That's after the break.
This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. Listen at schwab.com slash Washington Wise.
Consumers who maintained a high credit score during their working years often see those scores come down after they retire. WSJ personal finance reporter Amani Moise joins me. So Amani, why does having a high credit score matter?
Well, your credit score is a measure of your credit worthiness. So anytime you apply for a loan, credit card, the banks pull your credit report and they look at your score and that determines how much interest you'll pay.
But what's the trend here? How do credit scores typically change during one's retirement years?
So your credit score typically goes up for every decade of your life until your 70s. So after your 70s, it peaks at 762, and then there's a slight drop in your 80s to 756.
The credit score is this three-digit number that people place a lot of importance on. What goes into making up the credit score?
There's a lot of misconceptions about what goes into a credit score. And I got a really helpful graphic from FICO, and they break down the calculation. So it's 35% of your score is based on your payment history. That's the biggest and most important factor. Then 30% is your accounts owed. So that's how much credit you have, how much debt you have. 15% the length of your credit history, 10% your mix of credit, so that's having installment loans and revolving debt like a credit card, and then 10% new credit. So that's how many credit inquiries are hitting your account.
So what would drive down someone's credit score in retirement?
Credit scores are a combination of a number of factors, and one of those factors is your credit mix. According to FICO's analysis, borrowers who have a mix of different kinds of loans are better at repaying their bills.
Why do credit scores often decline after people retire?
So that means a mix of credit cards, auto loans, mortgages, really revolving versus installment. But once you're in retirement, you're less likely to do things like buy a new car and have an auto loan, and you probably paid off your mortgage years ago. So just based on the fact that you have fewer kinds of debt, that may hurt your score.
But retirement is supposed to be all about financial freedom. Why is a high credit score important to retirees?
Well, increasingly, credit reports and credit scores are being used in different industries. So, for example, health care. When you're trying to get admitted to an assisted living facility, they can pull your credit report. And if they feel like you're not a good credit risk, you won't be admitted. And another factor is insurance. Insurance companies also use credit-based scores, which can help determine how much you pay for premiums.
Some people see their credit score and they might see a change from month to month and they follow it in a granular fashion, like 756, 757, 758. Does it matter in those steps and how someone's credit score might change?
It depends on what range your credit score is in and how much it's dropping. So we talked about average scores across different decades. And yes, there is this drop from 762 in your 70s to 756 in your 80s. But that nine point drop isn't likely to have a huge material impact on whatever your financing options would be or anything else that your credit score is being used to qualify for.
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