3/28/2011 3:15 PM ET|
6 credit mistakes retirees make
Some faults may disappear with age, but poor money habits often linger on, and they hurt even more on a fixed income. Luckily, it's never too late to wise up.
While children and adults often look to their elders for wisdom, not all seniors are the best source for financial advice. In fact, according to Bankrate.com, credit card debt is growing fastest among older people.
A recent survey by CESI Debt Solutions in Raleigh, N.C., revealed that nearly 40% of seniors who have accumulated debt in their retirement years are not worried about paying it off before they die. The survey also found that 56% of retirees had outstanding debt when they stopped working. Another survey found that bankruptcy filings by people ages 65 to 74 rose 178% between 1991 and 2007, and that was even before the Great Recession.
While it's unusual for seniors to make so many credit mistakes that they push themselves into bankruptcy, many seniors make lesser mistakes that will still affect their finances. Here are some of the most common retiree credit mistakes:
1. Using credit cards to supplement income
Living totally without credit cards can be difficult, because they simplify online purchases and travel. The most responsible way to handle any credit card is to use it for the convenience it provides but always pay the balance in full each month. Seniors, however, tend to use credit for everyday expenses in order to supplement their fixed incomes, which can lead them into further financial trouble if they cannot make their credit card payments. The CESI survey found that 75% of seniors incurred debt for medical or funeral expenses.
2. Not choosing the right credit card
Seniors who feel they need at least one credit card should carefully consider how they will use it. If you have credit card debt now and want to pay it off, apply for a balance transfer card. But if you go this route, be careful. Some seniors have reduced the value of their transfer by paying a high fee for it, which just adds to the debt. Others have found that the introductory period that follows the balance transfer is too short for them to pay the debt in full, so they end up paying an even higher interest rate after the introductory rate ends.
If you know you will need to carry a balance in order to repay your current debt or anticipated spending, consider a credit card with a low interest rate. Some seniors have been burned by cards with a low short-term rate followed by a high rate, so be sure to read the fine print and know how long the interest rate will last. Also, try to avoid paying an annual fee. Seniors on a fixed income don't have a lot of money to waste on annual fees for credit cards, particularly if they carry more than one card.
3. Picking a card for its rewards
If your finances are healthy and you want a credit card to earn rewards, make sure you read the details about how the rewards program works. Some seniors have been frustrated by rewards programs with caps that prevent them from earning enough points to actually reserve a hotel room or take a trip. Compare credit cards to see how much you will need to spend to earn rewards and how many points you will earn for each dollar spent. There can be a wide range of rewards from card to card.
Make sure the rewards program fits your needs. If you want to travel, choose a card that provides the fastest travel rewards. Some seniors would rather earn and use rewards for day-to-day expenses such as gas and groceries, so look for a card that focuses on those rewards, or even a cash-back reward card.
4. Allowing your credit score to slip
The best credit card offers go to seniors with the highest credit scores, so seniors should definitely avoid hurting their scores by paying bills late or getting too deeply into credit card debt. AARP says credit card companies are offering better rewards to consumers who have excellent credit and use their cards regularly and responsibly. Accelerated rewards programs, no-fee cards, low interest rates and even complimentary airline tickets are available to seniors with stellar credit. Seniors with poor credit scores may find themselves unable to qualify for any credit card. They may have to use a secured credit card, which requires a deposit and sometimes an activation fee. These cards usually have low credit limits, too.
5. Co-signing a loan
Many seniors are naturally inclined to help their adult offspring buy a home or pay for college, but if the loan goes into default, they will be responsible for the debt, and their credit score could be ruined.
6. Not making a debt plan
While retiring debt-free is a worthy goal, retirees with debt need to make sure they have a plan for themselves and their heirs. Understand that retirement income such as a pension, a 401k, an IRA and Social Security benefits cannot be accessed by creditors. Be sure to inform your relatives that unless they are co-signers with you on a loan or a credit card, they are not responsible for your credit card debt after you pass away. The best idea is to find out what steps are necessary in your state to protect assets from creditors.
The bottom line
Retirees on a fixed income should carefully evaluate how credit can fit into their overall financial plan. Those who cannot afford their day-to-day expenses now should try to avoid taking on additional debt. They should instead consider a new spending plan.
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