Prepare for retirement – Review your credit requirements

Last updated on June 2nd, 2019 at 11:22 pm

Last Updated on June 2, 2019 by

Before you actually retire, you need to prepare as much for credit needs as you do for medical needs.  A number of subtle changes have been made during the past few years to credit reports.  Start with checking your credit which can be done for free once each year by going to this link “Free Credit Report Government Website”

You will need to check all three reporting agencies through this free process.  Your credit card issuer may give you access to free credit scores as well.  If not, you may want to spend the money to buy your score.  There are a number of scores available buy the one that best indicates what you plan e.g. buy a new home.

Should you desire to buy a new home, you will need scores from all three agencies Experian, Equifax and TransUnion.  You may be aware of Experian because most retailers use them for the purchase of a car or credit cards.  Equinox and TransUnion are relied more often by the mortgage industry.

Mortgage lenders average scores

Regardless a mortgage lender will usually average all of the scores and do the same for your spouse.  In some cases you can see what interest rate you would receive based upon your score.  The best rates are usually for scores above 760,  Some lenders will give their best rates to scores of 740 or higher.  The table below is a snapshot showing the differences in rates.  Most mortgages are written with scores in the 680-720 range.  You could save 0.40% by having an excellent score (>760) instead of a Good (680-759) or not so bad score a monthly savings of $49

Unless you have applied for credit recently you are probably unaware that a portion of your score is determined by the spread between your mortgage and what you originally owed.

A recent mortgage even if paid may be somewhat negative

Essentially the credit agencies are reviewing your equity.  If you obtained a new loan on a home in the past few years, your loan will not be seasoned.  You will have paid little down on the principal and thus received a hit on your credit score.  That old mortgage that you were paying on for the past fifteen years has been contributing positively to your credit score.

The addition of this element and the high weight it has on your score will have an impact if you decide acquire debt immediately after purchasing a new home or refinancing a new home.  You can miss a payment on a credit card for 30 days and if you have good credit the late payment will mean little to the score.  If you miss a mortgage payment you can count on that being on your report for seven years and it will be a large factor in your score, perhaps the largest.

Review the total available credit on your credit cards

To prepare for retirement, you should be sure that the amount of credit from credit cards is sufficient so that you can actually use your cards.  Another thing that credit agencies do is penalize your use of credit cards.  If the percent of use to the available balance is too high, your score will be adjusted in the negative direction.  In effect, if you have a card with a $5,000 balance and you use $2,000 of that balance, there will be a negative impact on your score.

To correct the credit card issue, apply for credit cards that benefit you and generally offer higher limits.  The Sam’s Club and Costco credit cards offer money back for using them at their stores and at other locations, as much as 5% on gas at Sam’s.  If you receive a credit limit of $10,000 and you have that $5,000 card, you now have a total limit of $15,000.  Using $2,000 will not result in any negative impact on your credit.

You will take a very small temporary hit for applying for the card but the benefit of higher balances offsets this.  Do not apply if you believe you will not be issued a card as the application hit will not be offset.  If you have good credit apply for two or three cards well before you retire, allow the credit checks the two years to go away.  You will be left with higher credit assuming you have used the cards and paid off the balances.

Obtain new credit two years before buying a new house

If you plan to buy a house for retirement, obtain the credit above at least two years before you apply for a home loan if you can.  Consider buying your retirement home before you move from your current home.  This will permit you to apply when you are employed which will help you during the mortgage application process.  If your loan will be purchased by a government agency e.g. FreddieMac, you must meet the income to expense ratios.

Do not believe advertising that indicates that they can fix your credit or improve your score.  This only works when they know that there are errors on your report e.g. someone else with the same name.  If your report is error free, your score will stand.

Writing a letter to a bank or creditor to ask them to adjust what they are reporting if it has been many years and your circumstances have improved considerably may work.  If you are still a customer of the creditor, a letter has a better chance of working.  Many years ago, you could challenge a credit report even when it was correct.  It was easier for the creditor to not respond to the agency and as a result the negative item was removed.  With computers to day, things tend to hang around until the mandated maximum time e.g. seven years.

If you finance that new car buy it before you retire

If you are planning to buy a car on credit after retiring and your income will be lower e.g. no employment income, buy it before you retire when you are still able to show employment.  If all you are drawing is Social Security a creditor may decide you are a bigger risk and give you a higher interest rate.

Student loans and other items may require some house cleaning.  Before and not after retiring is the best time to refinance these loans.  If you have guaranteed a loan for a family member, it’s your loan even if they have been paying for it.  Ask the family member to refinance the loan in their name.

Weigh the interest on your debt against income in an investment

Debt is not a bad thing, it permits us to have what we need and for some to have what they want.  Some of us obtained low interest loans during the past decade including 2% auto loans.  Some people even have mortgage loans at less than 2%.  If you are fiscally responsible and can control your spending and work from a budget, consider investing money rather than retiring some debt.  Remember that cash is king and the crisis of the last decade favored those with cash.  If you feel better paying off your debt after selling that big house and moving to a smaller one, go for it.  You may consider speaking to a financial advisor before retiring low interest debt.

An auto loan in the two-three percent range may be the last thing you decide to pay off in preparation for retirement.  It is very possible that you can earn more investing the amount of the payoff than the savings if you paid off the vehicle.  This way you still have a viable credit reference, very low interest and you would be earning more interest with the investment.  In the event of an emergency you would have that cash to use.

The last item for discussion and the most important is the mortgage.  If you own a home and it’s too big for you, consider moving.  If your home is located in a high cost area and the upkeep even if it is paid off is high e.g. property taxes and insurance, consider moving.  If you  move to a lower cost area, you could sell your house and use the equity to pay for some or all of the new house.

Should you have a mortgage payment in retirement or not?

This is the crux of the matter.  Should you have a house payment in retirement or not?  Consider the potential need for credit down the road.  If you are making a mortgage payment, you will maintain good credit, the best kind.  If a health issue arises, you would have a better chance of obtaining credit by having good credit through a mortgage payment.

On the other hand, your home is paid for and all you have to do is pay the taxes, insurance and upkeep.  If paying off the home gives you a better sense of security, do so.  Consider this however, if the interest rate on your home is lower than commensurate return on investment in the stock, bond or other market, you may be ahead by investing the money.

Forget that mortgage interest tax deduction

Forget the mortgage interest tax deduction as a benefit for having a mortgage.  With changes in the tax code, you will receive a large benefit that is better than deducting the mortgage interest (for most people).  There are investments that can earn more than 5% which is what the prevailing interest rate is likely to rise to within the next year.

If you are going to buy a retirement home for example on the Mississippi Gulf Coast and you will have a mortgage after retirement, consider buying it before you leave your employment.  Depending upon your credit, you may qualify to buy a second home or a rental property while you own and are paying on your principal home.

We plan to include some great referrals for mortgage financing and real estate sales for you to discuss options with.  The principals apply nationwide, rates will vary by geography as will the prices for homes.