Why does a good credit score matter even in retirement?

[00:00:00] Ralph Estep, Jr.: Can I ask you a question? And that is, why does your credit score matter even after you're retired? Picture this. Two retirees. Both with similar backgrounds, both with similar savings but one's living comfortably while the other's struggling to make ends meet. What's the difference? It's the credit scores.

[00:00:21] Ralph Estep, Jr.: So today I'll share a story that'll open your eyes to the hidden power of credit even in retirement. You might be surprised how much it can impact your golden years. So stay tuned to find out.

[00:00:36] Ralph Estep, Jr.: Let's start by taking a look back at yesterday's show. Yesterday, we talked about how to keep from burdening your heirs with an inherited IRA. And if you missed it, I want to encourage you to catch up. It was packed with crucial information that could save your loved ones a lot of headaches down the road. As always, you can find all of our episodes at askralph.com.

[00:01:00] Ralph Estep, Jr.: Today's question comes from Abby and she's actually in Ohio.

[00:01:04] Ralph Estep, Jr.: This is what she wrote. She said,

[00:01:05] Ralph Estep, Jr.: "Dear Ralph, I'm approaching retirement in a few years, and I've always thought that once I stopped working, my credit score won't matter much anymore. I've heard from friends actually talking about not even worrying about paying their bills. They claim that their credit is of no consequence. I also think that after all, I won't be taken on new loans, right? But lately, I've been hearing conflicting advice. Can you shed some light on this? Should I be concerned about my credit score in retirement?"

[00:01:35] Ralph Estep, Jr.: Well Abby, let me start by thanking you for your excellent question. And it truly is an outside of the park great question. And it's a common misconception that a lot of people have.

[00:01:45] Ralph Estep, Jr.: They think that these credit scores become irrelevant once they retire, but nothing is further from the truth and your credit score will significantly impact your financial wellbeing, well, into retirement. And I've got some great real-life stories that illustrate this perfectly. Now I want to remind you, this show is all about answering your question.

[00:02:04] Ralph Estep, Jr.: Just like Abby's question today. That's why it's called Ask Ralph. So keep those questions coming. You can send them to me. Here's my email address. It's ralph@askralph.com. You can also visit our website. That's at askralph.com. Click on that microphone icon and just tell me what's on your mind.

[00:02:24] Ralph Estep, Jr.: I want to thank you for joining me today on this journey. It's our financial Friday. Now, before we dive into today's topic, I want to remind you to visit our website. That's at askralph.com. I want you to join our community. I want you to share the show with others who might benefit from this information.

[00:02:41] Ralph Estep, Jr.: And when you join our community, you'll get a free copy of my book. It's called Mastering your finances. Now you can buy this book on Amazon, it will cost you 10 bucks, but it's yours absolutely free when you join our email list. So go do that right now.

[00:02:57] Ralph Estep, Jr.: Well, let me start by sharing a relevant Bible verse.

[00:02:59] Ralph Estep, Jr.: This comes to us from the wise book of Proverbs 22:1. And it says this: " A good name is more desirable than great riches; to be esteemed is better than silver or gold." That's a powerful verse. And it reminds us of the importance of maintaining a good reputation, which in our modern world is simply a good credit score. Now there's a lot of other things, but part of that good reputation is a good credit score.

[00:03:29] Ralph Estep, Jr.: Well, let me tell you a story about two of my clients, Tom and Jerry. And no, I'm not talking about the cartoon characters. But there are financial situations that were just as dramatically different.

[00:03:39] Ralph Estep, Jr.: Now, Tom and Jerry they're both 65 years old and they had both just retired. They had similar backgrounds; both had worked in middle management positions for most of their careers. They had comparable retirement savings. Each of them owns homes. They're about the same in value. And on the surface, you'd think their retirements would look pretty much the same.

[00:03:58] Ralph Estep, Jr.: I mean, they work the same jobs. So they had about the same amount of retirement savings, they both own homes of similar value, so you think they were about the same. But there was one crucial difference and that was the credit scores. Now Tom had always been diligent about maintaining an excellent credit score. Tom paid his bills on time.

[00:04:18] Ralph Estep, Jr.: Tom kept his life in order. He kept his credit utilization low, and he was careful about opening new accounts. As a result, Tom had a great credit score of over 800 points. Now, Jerry on the other hand, well, let's just say he's been a little less careful. Jerry sometimes missed payments. Jerry maxed out his credit cards and had a few negative items on his credit report. And here's the problem with Jerry. His credit score was a problematic 580. Not great. Now you might be thinking, "Ralph, they're retired.

[00:04:52] Ralph Estep, Jr.: Who cares? They've got their savings. They got their social security. How much could their credit scores really matter?" Well, let me tell you, it mattered a ton. It mattered a lot more than either of them expected. About a year into retirement, both Tom and Jerry decided they wanted to downsize their home.

[00:05:09] Ralph Estep, Jr.: They had these big homes that were too big for their kids had left the nest and the housing market had change and they both want a defined, a smaller downsize house. And they both found one. They both found properties which were more manageable and were better suited for their needs. Now, Tom, he had an excellent credit score, and Tom was able to secure a new mortgage at guess what? A fantastic interest rate of 3.5%. Well, what did this mean for Tom? His payments were manageable. It gave him the ability to live comfortably and to afford his new home.

[00:05:42] Ralph Estep, Jr.: And he still had money left over for travel. He did all kinds of traveling. He took vacations and he was able to spend that money that he had left over on those fun activities in retirement. Jerry, as you might've thought, faced a very different situation. Now Jerry had poor credit, like we talked about. A 580.

[00:06:02] Ralph Estep, Jr.: So when he went to buy this house, he was what they call a high-risk borrowing. Nobody wants to deal with the high-risk borrower, especially right now. He could get a loan. But the best interest rate he could get was 7.5%. Think about that for a second. That's double Tom's rate. Because of his credit score. But what did that high rate mean to Tom?

[00:06:23] Ralph Estep, Jr.: It meant, and significantly increased his monthly payments. Think about that for a second. Jerry had that rate at 3.5%. Tom had it at 7.5%. So think about how much of an impact that was. That increased his monthly payments. And guess what that did? That put a strain on his retirement budget. But guess what? The impact

[00:06:46] Ralph Estep, Jr.: didn't just stop there. A few months later, both Tom and Jerry needed to replace their cars. You know, they had downsized and all of a sudden, the car didn't work for them anymore. Now Tom, he had the high credit score, goes into the car dealership, finds the perfect car he wants. Sits down with the finance manager and a financial manager says, Tom, I can see that you honor your credit.

[00:07:08] Ralph Estep, Jr.: So guess what? Right now we're offering 0%. Yes. I said that. 0% APR as a promotional net new car. So guess what? Tom was able to finance his purchase without paying any interest at all. Zero interest. That is fantastic. Now Jerry went into the car dealership, and he wasn't so lucky. The best auto loan that Jerry could come up with was 11%.

[00:07:32] Ralph Estep, Jr.: He sat in the finance guy's office. He found the car he really wanted. The finance guy says to me, he says, Jerry, listen. You got some bumps on your credit my friend. And it's going to be hard to get this, but you know what? I've found a lender who will do this. But unfortunately, the interest rate's going to be a little high.

[00:07:49] Ralph Estep, Jr.: It's going to be 11%. On Jerry said, wow, man, I can't afford this car at 11%. So what did Jerry have to do? He had to settle for a much cheaper car. Because if not, he was going to stretch his budget too thin trying to make those big payments because of that big difference. Think about that. 0% APR. 11% is going to impact you and what you're able to afford. But guess what? The differences continue to pile up. Let's talk about Tom.

[00:08:19] Ralph Estep, Jr.: Tom wanted to take a dream vacation. He didn't want to pay for it all front, so he was able to open up a new rewards credit card with a generous signup bonus. They gave him several hundred dollars just for signing up. Now Jerry, on the other end, he was unable to qualify for those premium credit cards and he missed out on those perks. Another thing.

[00:08:37] Ralph Estep, Jr.: A lot of people don't think about this one. Even their insurance premiums were affected, because guess what? Most insurance companies use credit scores now. They use it as a factor in determining rates because they look at it as your character. Now in our situation, Tom had a high credit score. He got low premiums on both his home and his auto insurance. Unfortunately, Jerry, who didn't honor his credit had to pay significantly more for the exact same coverage as Tom. So as the years went by, these differences compounded. With Tom, good credit has lower expenses meant he could leave more of his retirement savings invested, he was able to let that money grow. Jerry, on the other hand, because of his credit score not being great, he had to withdraw more from a savings each year because he had higher expenses. But what did that do? It depleted his nest egg faster than he anticipated. So let's take a snapshot. Five years into retirement, the financial pictures of these two men who started in similar positions, like we talked about at the beginning. They were in the same place.

[00:09:42] Ralph Estep, Jr.: They were at the same starting line, but now five years into things, they are completely on different planets. Tom's living comfortably. Tom got his feet up. He's enjoying retirement. He's got peace of mind. He honored his credit and he's reaping the rewards from that. Jerry's not so lucky. Jerry's live in a stressed life about money, is constantly worrying about whether his savings are going to last because he's having to use that to pay his expenses. Now you might be asking, Ralph, dude, help us here.

[00:10:16] Ralph Estep, Jr.: Is there anything Jerry could have done differently? Yes. Absolutely there's things he could have done differently. And here's the silver lining to the story. And if you listen to me, you know I say this all the time. It's never too late to start improving your credit score. So let's talk about some actionable steps that you can take, whether you've already retired or planning for retirement.

[00:10:34] Ralph Estep, Jr.: Listen, I've talked about these on many shows and want to encourage you to check them out. But I'm going to give you a quick recap of those things right now. So one of the things that Jerry could do is he could check his credit report regularly. You're entitled to this free credit report every year. This is something you've got to do.

[00:10:51] Ralph Estep, Jr.: Review those reports and carefully dispute any errors. Now, in Jerry's case, I think Jerry just doesn't care. Jerry just says the heck with it. I'm retired. I don't really give a, give a crap. That's a good way of saying it. Another thing you can do, and again, this is something Jerry's not doing is pay your bills on time.

[00:11:09] Ralph Estep, Jr.: Maybe you set up automatic payments if you need to, because the truth is, payment history is the most significant factor in determining your credit score. Like we said with Tom. Tom decided to keep his credit utilization low. Tom never lets his credit become more than 30% of his available credit. And that's the key. That will help you on your score. Jerry, he could care less. The next thing. This is counterintuitive.

[00:11:36] Ralph Estep, Jr.: A lot of people don't get this one. But don't close old credit accounts even if you're not using them, because one of the components of a credit score is the length of your credit history. Another thing you got to do. And this thing, I think Jerry learned the hard way. You got to be cautious about opening new credit accounts. When you open a new account, it’s going to decrease your credit score.

[00:11:58] Ralph Estep, Jr.: And if you need to go get money because you've got a situation like Jerry had, Jerry wanted to buy that new home and Jerry wanted to buy that car. Because he was already circling around, looking for credit, his score was diminished. And the last thing. I can't stress this one enough. If you're struggling with debt, consider credit counseling your debt management.

[00:12:18] Ralph Estep, Jr.: Again, I did a show on this a few weeks ago. I'm going to encourage you to do that because they can help you get back on track without damaging your credit score. And I can help you as one. I'll talk about that a little bit later in the show. Remember this. Improving your credit score is a marathon. It's not a sprint. Listen to me on this. It's a marathon.

[00:12:38] Ralph Estep, Jr.: It's not a sprint. It takes time. It's not going to happen overnight. But the benefits as we can see, just in this simple example of Tom and Jerry can make a huge difference in your retirement. It could really make the difference of whether you're enjoying your retirement or you're living this stressful existence.

[00:12:54] Ralph Estep, Jr.: And nobody wants to live a stressful existence. Well, let's wrap up a couple of key things we talked about today. Number one thing. If you haven't heard anything else I've said today, your credit score matters significantly even as you transition into retirement. I could argue maybe even more. Because you don't have a lot more time to recover from things. You don't have that extra money coming in to solve things.

[00:13:16] Ralph Estep, Jr.: Second thing. A good credit score can lead to lower interest rates. It can lead to better insurance premiums, and more financial opportunities. We learned that today. Number 3. Poor credit can strain your retirement budget and deplete your savings faster. It's simple math. If you're having to pay more for the same things as somebody else, you've got to be getting that money from your retirement.

[00:13:40] Ralph Estep, Jr.: So guess what that's going to do. It's going to deplete your savings which means you're going to have less to keep investing and less to grow. And the number 4 and this one, I got to stress. It's never too late to start improving your credit score. You can start today. You can start with a little thing.

[00:13:56] Ralph Estep, Jr.: That's the thing, a lot of people get hung up on, but Ralph, I got this huge amount on overcome. Well guess how mountains are overcome? By taking the first step. So I hope this story of Tom and Jerry has illustrated just how important your credit score can be even after you stopped working. Remember this. Your financial health is an ongoing journey.

[00:14:14] Ralph Estep, Jr.: Your credit score is a crucial part of that journey at every stage of your life. Well, thank you for tuning into today's episode. Tomorrow, I'm going to be replaying my interview with Paul Granger. Now, Paul and I had a great interview, it was on his show, and we discussed how living a financially secure Christian life is possible.

[00:14:33] Ralph Estep, Jr.: It's a powerful conversation and I want to encourage you to check it out. Well let me just say right now. Maybe after today's episode, you're like, Ralph, dude, man, you brought it down today. I'm feeling terrible about my situation. I'm retired. My credit stinks. Well, maybe you're feeling overwhelmed.

[00:14:49] Ralph Estep, Jr.: All this information has caused you to worry. Well I'm going to say this. I want to encourage you. I'm going to help you. If you schedule an appointment with me, we can create a personalized plan for managing your finances. And you can do this by going to askralphpodcast.com/store. Do it right now. I will charge you a $150 consultation fee, and I will work with you to improve your personal finances. Maybe at your business finances

[00:15:15] Ralph Estep, Jr.: you're worried about. Maybe you're looking for ways to grow your business. I can help you with all of these things. The overall goal is to help you achieve all your financial goals. So schedule today and let's create a plan that ensures your financial success. Remember this. My passion is to help you achieve financial success. I truly want you to live out your dreams.

[00:15:36] Ralph Estep, Jr.: I want you to grow in your faith and I know together, if we work together, we can master your finances from a Christian perspective. So as I always say, I always end the episodes like this. Stay financially savvy and may God bless you abundantly.