Unlocking Your Future: The Key to Pre-Retirement Credit Growth for Success

Retirees are sometimes surprised when they go to their bank and try and get a loan for a project or purchase only to find out that they can’t borrow as much as expected.

This happens because their borrowing capacity has significantly reduced after retirement. To avoid this situation, we advise clients who plan to retire in the next 6 to 12 months to take a Line of Credit (LOC) from their bank before they retire. Even if they are homeowners with no mortgage, it’s essential to do this while they are still earning money. Once their income drops or they stop working, banks become hesitant to lend as much, and credit scores tend to fall.

Preparing your finances for retirement can also lower your credit score. Simple actions like paying off loans and canceling old credit cards may seem like a good idea, but they can actually lead to a reduction in your credit score. Although longer credit histories can somewhat counteract this, these factors still make it difficult to borrow in the future.

Here are the main reasons why taking on a line of credit before retirement is beneficial:

1. Emergencies: Unexpected situations like roof leaks, car breakdowns, or the urge for a dream vacation may arise, and having a line of credit can be helpful in handling such expenses.
2. Credit Rating: Your credit rating tends to decrease when your income decreases after retirement.
3. Borrowing Capacity: As your income reduces, so does your ability to borrow money from banks.
4. Banks’ Willingness to Lend: Banks are less willing to lend money to retirees, making it harder to get loans after retirement.
5. Helping Loved Ones: Having a line of credit can enable you to assist a loved one with significant purchases like a car, house, or cottage.

Before retirement, banks may require you to “activate” the LOC with a small loan that can be instantly repaid. You should ask about this to ensure that the LOC is accessible when needed. With online banking, you can often transfer the LOC over with just a click of a mouse.

According to the Wall Street Journal, seniors are accumulating debt at a faster rate than when they were younger, which is also the fastest in history.

Despite this, we still recommend keeping your finances simple, with as few bank accounts, credit cards, and brokerage accounts as possible. Simplicity can help you manage your finances effectively during retirement.