Are you considering the purchase of a retirement home? Or perhaps simply leasing a seasonal residence in a retirement community? Your credit score, no matter your age, is critical to managing your financial matters. Let’s discuss the various components and uses of a credit score that will assist you in achieving your retirement goals.
If you own property and/or an automobile, your insurance rate is partially dependent upon your credit score. The FICO (Fair Isaac Corporation) Score is an industry standard that allows lenders and other service providers to evaluate your capability and mindset toward credit. We highly recommend our retiring clients eliminate all indebtedness before retiring. However, many forms of credit extension, other than bank loans, rely on your credit score for purposes of granting the credit. Property and casualty insurance companies use your credit score to determine how responsible you operate your car. How is this possible? The company attributes your good credit history to also being a responsible automobile owner. Granted such attribution is not the only factor but it is a prominent function of the determination of your premium for insurance.
Your credit score is computed based on several factors:
- payment history;
- types of credit you obtain;
- total amount of credit compared to income; and
- amount of unsecured credit available to you (i.e., credit card lines of credit that are not used but available).
One of the goals of my life is to achieve a perfect credit score of 900. This is a Herculean task simply because of the manner in which the score is computed.
For years, I have maintained an 800+ credit score, which, at times, would drop for no apparent reason. Further research revealed that my score would be reduced because I didn’t use my credit cards! Yes, you read this statement correctly. I didn’t use my cards and my credit score would be reduced because of available unsecured credit that was not used but could be used immediately. Seems a little draconian to me but this is the rationale of the FICO algorithms.
We have many clients who have not utilized credit for many years. The only form of credit that is available to them is their credit card. With significant cash flow and net worth, you would think their credit score would be perfect. Not so. Their scores will be reduced for a lack of credit history of sufficient volume.
Even in our retirement years, the need may arise for you to borrow from a bank, request a better credit card and/or require insurance for your property. All of these transactions require an excellent credit score. If you are concerned about your credit score, or feel your credit history is incorrect, request a free copy of your credit report from Experian, Trans Union or Equifax. (Go to www.annualcreditreport.com to request your free report.) By law these credit reporting agencies are required to issue you one free copy of your credit report annually.