January 1, 2012

Credit Card Debts In Retirement

A while ago I saw this article on USA Today Dying with debt: A dirty little retirement secret about retirees who have credit card debts.    I have one relative who I know of who retired and then built up a lot of credit card debt.

 Yes many senior citizens do also have credit card debts.    If you look at the Survey of Consumer Finances from 2007 (latest available) they give average debt levels by age groups.    Credit card debt is not as common among retired people but it still happens.    In the SCF 2007 report 37% of people age 65-74 had credit card debts averaging $8,400 (among those with debt) and 18% of people age 75 or over had credit card balances averaging $3,900.   If you look at all families 46% had debts averaging $7,300.

Of course not everyone age 65 or older is actually retired and many people over 65 are doing well financially.   But I assume that most of the seniors with debts are using credit cards for emergencies for which they can't afford or simply not being responsible with their finances.  I would also suspect that at least some retired people with credit card debts think they are going to 'stick it to' the credit card companies by racking up a large debt balance and never paying it off within their lifetimes.   I don't imagine this is how most people think about their debts but I assume that at least a few people don't feel so much pressure to repay a credit card debt in such a situation.

You aren't going to beat the bank with minimum payments
As we all know credit cards have very high interest rates as a general rule.   These interest rates can cost you significantly more than the original purchase over the long run.   Lets say for example your card as a 19.9% interest rate.  In 5 years you'll have paid them the entire amount of the loan in interest and you'll still owe them money.    My AmericanExpress card has a 15.24% rate right now.  If I only paid the monthly minimum payment on the balance then it would take 21 years to pay it off and it would cost me 216% of the original loan.   So if I borrowed $10,000 I'd have too pay them $21,600.   If you're 65 years old then there is a very reasonable expectation that you'll live another 20 years or more.    So you could end up paying high interest rate for decades.   Thats not exactly sticking it to the bank in my opinion.  

Will your relatives have to repay the money?
If your debt out lives you then your relatives will not have to pay the bills.    However your estate IS responsible for any debts that you owe.   You might think, well doesn't that mean the same thing?  If the estate has to pay the bills then the heirs won't get the money.   While that is true there is an important difference here.   A creditor can not come after relatives for money if the estate can't cover all the debts.

What to do?
How you ought to deal with credit card debt in retirement depends on your situation.   If you are living on a low fixed income without much in assets then I would strongly consider pursuing credit counseling from a non-profit member of the National Foundation for Credit Counseling.   They will help you figure out how to best deal with the debt.    Otherwise you should figure out how to put extra money towards your debt and pay it down faster rather than just pay minimum payments.   If your credit score is good then you may be able to move the debt to a 0% promotional rate or get other financing at a lower rate.

Image credit : Michelle Meiklejohn / FreeDigitalPhotos.net

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