Retirement is a time of life for many people when free time is in abundance but income is limited. This makes it especially important to be financially frugal and think carefully about how to pay for every expense.
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Credit cards can offer some reprieve in between Social Security checks or retirement account disbursements, but is it a wise move to use them at this later stage of life?
Experts explain why you should still use a credit card in retirement.
Also, does your credit score matter anymore when you are retired?
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“One of the most exciting aspects of credit cards is that when you use them the right way, the issuers pay you,” said Erica Sandberg, consumer finance advisor for badcredit.org. “If you are on a fixed income and on a budget, a rewards card can be especially attractive.”
A cash-back credit card will reward you for each charge you make.
“Use it for all of your expenses, but pay the bill as you go along,” Sandberg urged. “This way you won’t face a large balance in 30 or so days, but you will profit from the process.”
For example, she pointed out that if you get a card that offers 2% cash back on every purchase and you use it for $2,000 worth of expenses — including food, gas, medical expenses, utilities and other essentials that you would normally pay for from your checking account — you’ll end up with $40 back.
Sandberg said, “That can be enough to cover a nice meal out — a tax-free gift from the issuer — just for charging what you normally buy and can afford.”
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To Keep Your Credit Score High
Continuing to use your credit cards in retirement also keeps your credit score in good standing, Sandberg said. The reason this matters is that you may want to do something such as take out equity in your home for a remodel.
“By adding a constant flow of positive data to your credit report with a credit card or two,” she said, “you can keep your scores elevated and qualify for a low rate equity loan or HELOC.”
Keeping your scores high is like insurance on money you may want to borrow at the lowest possible cost, she explained.
It Protects You Against Fraud
Credit cards are also useful for protecting your money in various ways, according to Malcolm Ferrante, international finance expert with CSB Group.
“Debit cards take funds straight from your account, so fraud is a direct loss,” he said. “Credit cards offer stronger legal protections against fraudulent charges that debit cards don’t provide.”
He suggested this gives retirees greater security.
“Credit cards also offer recourse if a purchase goes wrong, like defective items or undelivered goods,” he said. “You have leverage to dispute charges or get returns covered that cash/debit lack.”
They May Offer Other Perks
Some cards include useful perks such as extended warranty protection, purchase protection and travel insurance, Ferrante said.
“While interest needs avoiding, using a card responsibly lets retirees benefit from these extra services,” he said. “Simply paying statements in full each month utilizes the protections without interest costs.”
Ferrante does warn that using credit as a retiree does require more planning due to lower incomes, but it isn’t impossible with the right card.
“Low-fee cards that report usage to credit bureaus can be good fits. Speaking with card issuers openly about retirement financing also helps them understand individual situations. With preparation like proven income from pensions and showing responsible past credit, approval is achievable.”
It Can Help With Budget Management
Furthermore, using a credit card can help with budget management, according to Josh Michaels, founder of Money4Loans.com.
“Many cards provide spending reports, making it easier for retirees to track their expenditures and adhere to their budget. This is essential for managing limited retirement funds effectively.”
For retirees, credit cards are more than just payment tools; they’re strategic assets, Michaels asserted.
“From preserving credit health to leveraging fraud protection and rewards,” he said, “the judicious use of credit cards in retirement can fortify financial security and enhance lifestyle quality.”
However, Be Cautious
Despite all of these very good reasons to continue using a credit card in retirement, be cautious.
“Carrying debt on a credit card month over month can be very dangerous for retirees,” said Jay Zigmont, Ph.D., CFP and founder of Childfree Wealth. “There is a difference between using a credit card and keeping a balance on a credit card. As a retiree, you can use your credit card to protect yourself and earn points, while paying it off regularly, even weekly, to not carry a balance.”
Zigmont recommended using a cash-back credit card that has no annual fee.
“With a cash-back card, you can get 1% to 3% of what you pay back as a credit on your balance,” he said. “If you are paying off your card every month, you won’t pay any interest or fees but will effectively save money on every purchase.”
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