September 11, 2011 6:00 AM PT

How Retirement Can Increase Your Credit Score

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As Americans get closer to retirement, many assume that their credit score no longer makes a difference. Their house is paid off and their children have all graduated from college, so they assume they will never need to rely on credit again.

However, these individuals are forgetting to take into consideration a couple of things. My colleague, Sierra Dawson recommends, "you ensure your credit score remains the same or improves if you utilize credit cards or a home equity line of credit." This is because banks follow the credit scores of their current customers to determine if their credit card and line of credit limits will remain the same, be increased or in some instances, even decreased.

The good news is that many Americans actually see their credit score increase in retirement. Here are four of the factors that will help you increase your credit score as you go into retirement.

1. The longer the history, the better the score

When you are young, your credit score won’t be as high simply because there hasn’t been enough history to determine what type of habits you will have with your credit. But, as you have had more experience with credit, as long as you have had positive credit habits (always paying on time, obtaining a mix of credit, keeping credit card balances low), your credit score should continue to improve over time.

When you reach retirement, you are likely to have at least 30 to 40 years of credit history under your belt. With well established habits, the scoring algorithms have higher confidence that you will pay your credit cards on time each month and will assign you a higher credit score.

Of course, if you haven’t always been responsible with your credit habits, your score won’t necessarily be higher just because you have the longer credit history.

2. Downsizing your lifestyle.

Many couples choose to downsize their lifestyle as they enter retirement. Most commonly, this involves selling the family home and purchasing a smaller, easier-to-maintain home. If you choose to get a mortgage instead of purchasing the house outright, it will help increase your credit mix, which will boost your score.

It is a common misconception that zero debt will mean a higher credit score but that isn’t the case. So taking on a mortgage that you are able to pay on time each month will help boost your credit score through your retirement.

3. Better positioned to pay off debts.

Many retired individuals find that they are in a better position to pay off some of their outstanding credit card debts. This is because they are able to use the excess funds from the sale of a home or draw on their retirement accounts and Social Security payments. As you lower your debt to credit limit ratio, you will start to see improvements in your credit score.

However, before you get too zealous on paying off your credit cards, you will want to draft a budget to ensure you aren’t burning through your retirement funds too quickly. Otherwise, you will need to rely on credit more than you would probably like during retirement.

4. Lower impact of hard inquiries.

When you apply for a loan, your credit is pulled from the credit bureaus. This results in a hard inquiry. Hard inquiries have a slight negative impact on your credit score (about five points per inquiry).

Credit bureaus understand that consumers will want to shop around for the best interest rates, so they have built into their scoring algorithms to cluster together hard inquiries that take place in a two-week period.

When you’re working full-time, there really isn’t much free time during the day to shop around for the best loan rate. This often results in the “loan shopping” process to be spread out over more than just a two week period.

However, when you retire, you have some extra time during the day that helps make the process more efficient and get completed in a shorter amount of time. This means you can get your credit applications completed so your hard inquiries are clustered together and have a lesser impact on your score.

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