Why Credit Card Debt Matters in Retirement

In the 1980s, 38% of U.S. households headed by someone over age 65 carried debt. Today, the percentage has jumped to 63%, with credit cards being the most common type of debt among the retirement-age crowd.

Credit card debt matters in retirement, even if you can comfortably make the monthly payments. Here's why.

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Reduces financial flexibility

As you planned for retirement, chances are you never anticipated carrying a credit card balance (or two). In all likelihood, that's because there was no way to know what the inflation rate would be or which of your everyday purchases were likely to cost more. No matter how well you planned, it's possible to be caught by surprise.

The result of high prices when living on a fixed income is an increased need to turn to credit cards to cover expenses. And if you're unable to repay the credit card in full each month, you're left with a balance that can be tough to shake. The extra monthly expense can put the squeeze on financial flexibility.

Let's say a friend asks you to attend a concert. Typically, you have money set aside for miscellaneous fun activities, but those funds have been diverted to pay your monthly credit card statement. If that's the case, credit card debt could prevent you from fully enjoying retirement.

High interest rates

While federal law limits the interest that credit card companies can charge members of the military to 36%, there is no law limiting the interest they can charge other consumers. Some states have usury laws that limit interest rates, but these laws typically apply to the state where the card issuer is based rather than to the state where you live. To make matters more challenging for consumers, credit card companies make a point of operating in states where usury laws are nonexistent or favorable to them.

The average credit card interest rate today is between 20% and 22%, and because it is variable, it can change at any time. Someone who's still working may be able to get ahead of credit card debt by picking up overtime or finding another way to bring in extra cash, but it can be tough for those not working. Unless you plan on working in retirement (which many do), living on a fixed income makes it more difficult to keep up with changing payments.

Trade-offs

Anything that causes you to tighten your belt -- whether it's higher utility bills or credit card payments -- can lead to trade-offs. If you find yourself choosing between making a credit card payment and paying for a prescription or other vital expense, it's a sign that it's time to find your way out of debt.

FICO score

It's easy to believe that your credit score doesn't matter as much once you're retired, but nothing could be further from the truth. Your credit score determines the interest rate you'll receive the next time you finance a vehicle, take out a loan to purchase a new water heater, or apply to rent an apartment. If your monthly credit card debt is relatively large compared to your income, that imbalance could drag your score down.

Risk of depleting savings

It can be tempting to tap your retirement account to pay off credit card debt once and for all. However, there's a significant downside. For starters, if you withdraw money from a traditional retirement account, you'll owe taxes and could be pushed into a higher tax bracket. Equally important, your retirement account is intended to last the rest of your life.

While withdrawing money to pay off debt may seem like a sensible solution, it may hinder your long-term well-being.

What to do if you feel trapped by credit card debt

If you can't see a way out of credit card debt, you don't have to go it alone. You can find help through nonprofit credit counseling, specialized legal resources, and government-backed programs. Two organizations well known for fixed-income financial management are the National Council on Aging (NCOA) and the National Foundation for Credit Counseling (NFCC).

If credit card debt is preventing you from living your best retirement, help is available.

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