Why You Don

Borrowing, Credit Rating, Investing & Retiring, Retirement

You’ve reached a point where you don’t have to use credit cards anymore. Your home is paid off. You don’t have other outstanding debts. You must be an excellent credit risk, right?

As strange as it sounds, creditors do consider you a risk when you’ve become “credit-retired.” If you haven’t been using credit for some time, you don’t have any recent information in your credit report – which is the primary method lenders use to assess your risk. If lenders can’t assess your risk, they won’t extend credit.

Why do you care about credit ratings if you have resources to pay for everything? For one reason, you can’t count on those resources lasting – consider a stock market crash, an expensive medical condition, or other event that could rapidly drain your resources. You could eventually be in a situation where you need credit again for a large purchase – such as replacing your car or downsizing to a new home – and cash simply isn’t feasible at the time.

Lack of a credit score limits other financial options. For example, it would be difficult to take out a home equity loan or line of credit to upgrade your existing home. If you’re still making mortgage payments, you may have difficulty refinancing to a better rate without non-mortgage credit information to confirm your creditworthiness.

A good credit score is also essential to getting the best rates for running expenses. Credit-based scoring is often used to determine premium levels for home and auto insurance – meaning that you may pay more than someone in a lesser financial condition but with a known credit history.

Cell phone plans, utility deposits, cable/satellite TV companies, and other services run a credit check before making offers. With limited or no credit history, you are unlikely to receive the best offers and you may have to pay higher deposits to initiate services.

Retirees or near-retirees sometimes assume that responsible credit during the working years has established good credit for life. They may not realize their error until it’s too late. A poll by the credit bureau TransUnion found that around one-third of Baby Boomers are risking damage to their credit scores by cutting back or eliminating their use of credit.

Gerri Detweiler, Head of Market Education at Nav, relates the story of her credit-responsible father who was notified that he didn’t get the best rate on his auto insurance. “He has houses paid for, his cars paid for, he has maybe one credit card,” notes Detweiler. “He just doesn’t have much credit.”

The concept is frustrating to responsible consumers but consider things from a creditor’s point of view. They know that everything was fine up to the point where you stopped using credit, but there’s no indication why you stopped using credit.

If you’re in a position where you don’t have to use credit, you can still maintain a score by using at least one credit card for your purchases and paying off the card at the end of each month. If you want more credit, check out our list of credit card offers. You can maintain a solid credit rating without worrying about interest charges.

In that situation, you can come out ahead by choosing no-fee cards that provide the best rewards for you. Whether it’s travel rewards, a straight cash-back offer, or some other form, you can reap the benefits without any associated fees or payments. Credit card companies may not make any money off you in that case, but that’s their problem. You didn’t make the rules of credit assessment – you’re just playing by them.

You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

Photo ©iStockphoto.com/alfexe

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