Using Credit in Retirement… the Good, the Bad, and the Ugly
In retirement, you’re likely to miss certain aspects of your working life that you’re no longer able to do as much. One of them is using credit. You might be wondering: is there even any reason for retirees to use credit? Moreover, should they care about their credit scores at all?
In today’s video, Margaret Manning sits down with money expert Pam Krueger and business professor Josh Escalante Troesh to distinguish between good credit and bad credit, and why it should matter even in retirement.
Good Debt vs. Bad Debt
The median debt for the average household led by a 65-year-old is $35,000 – two and a half times more compared to 18 years ago. This shows that a lot of people have grown accustomed to using credit that debts continue to accumulate even during retirement.
But when we talk about credit – or debt – there are two types: good debt and bad debt.
Good debt is a long-term investment that will eventually grow in value. An example is taking out a student loan to pay for higher education. On the other hand, bad debt is debt that comes from purchasing things that quickly lose their value. An example is buying clothes or food.
Once we retire, we have fewer reasons to acquire good debt. So how should we use credit? Should we use it at all?
Reframing the Concept of Debt
The words “debt” and “loans” often contain negative connotations. Josh compares debt to a time machine: it takes money from our future selves and transports it to our current selves. Looking at it this way, we can understand that spending too much now would leave so little for ourselves in the future.
However, debt in retirement is not always bad. Some people opt to use credit cards for various reasons. Some use it for emergencies. Others use it to help their adult kids. Some still use it so that they wouldn’t have to take from their savings accounts. Using credit can get very complex. One way for us to understand it is by looking at it through the context of our lives.
That is, money should not just be about increasing what’s in our bank account. Thinking about money in a holistic sense helps us make informed decisions, say yes to important things, and choose situations that matter.
Using Credit Smartly
Smart people don’t let credit rule their lives. Before taking out a credit loan for buying a car, for example, these smart credit users already have a firm stance about why and how they’re going to do it. This way, they avoid being swayed into buying a more expensive car and only pay for what they wanted in the first place.
When it comes to using credit for investing in something, on the other hand, both Pam and Josh disapprove.
For one, investing in stocks or bonds using a credit card is statistically impossible and is likely to incur higher risks. Investing in a business using credit, on the other hand, may gain back astronomical returns. However, there are better ways to start a business, such as using loans. Suppose you use up all your credit on a business investment, then it’s going to be much more difficult to get a loan in the future.
Using Credit in Retirement
There are many debates about using credit. But one good way to use credit in retirement is to do so holistically or in relation to the people around us.
Have you ever used credit while in retirement? What were the situations that made this transaction necessary? Share your thoughts below!