5 credit card traps that can ruin your retirement

Your golden years should be filled with things you've always dreamed about. Maybe it's a cruise to the Mediterranean with your significant other. Or maybe you're just looking forward to having the time to attend your grandson's baseball games.

These dreams can quickly turn into nightmares if you aren't careful about the way you handle credit cards. A study by Demos showed that the average credit card debt among those 65 and older was $10,235 in 2008. This is a 26 percent increase between 2005 and 2008, which is also the biggest jump in any age group. Keep in mind that those numbers don't even reflect the worst years of the recession.

Think before you use your credit card and you can protect your retirement dreams. Here are a few of the most common traps to avoid:

#1: Racking up charges for your adult kids and/or grandchildren

When your baseball-player grandson needs a new bat and his parents can't afford it, it's awfully tough to say no. But try very hard to! Once you start down this path, your family might start eyeing your credit card to get things they want. And guess what? At the end of the month, the statement will arrive at your house, not theirs. So be tough and learn how to gently, but firmly, say no.

#2: Co-signing a credit card for a college-student grandchild

This is a relatively new trap and it's related to the Credit CARD Act. The Act prohibits anyone under twenty-one years of age from getting a credit card unless they can prove they have enough income to repay debts.

If you co-sign, your under-twenty-one grandchild can get a credit card. Well, you might think this is okay because your grandchild is really responsible. Your grandchild may be a great kid, but when using plastic for the first time at college, don't underestimate the appeal of pizza parties, midnight snacks at the local drive-through and the siren call of the mall.

If a credit card is necessary for your grandchild, there are other options. One option is to let his or her parents make your grandchild an authorized user on one of their cards. See how nicely that works? They get the bill, not you.

#3: Not being vigilant enough about identity fraud

According to the FBI, senior citizens are frequently targeted for credit card fraud. On this page, the FBI gives senior citizens a long list of great tips on how to avoid credit card fraud. In fact, take a minute to read the whole page and you'll also find tips for avoiding other types of fraud, too, such as investment scams and the ever-popular Nigerian letter scam.

But there are a few tips, in particular, that you should always keep in mind. One, make sure that when you shop online, you see the padlock icon in the address bar. Two, be skeptical of unsolicited emails boasting great deals that you can get with your credit card. And three, check your credit card accounts online every day. This is one of the most effective ways to catch credit card fraud early. Report any suspicious activity to your credit card issuer immediately.

#4: Not sticking to your retirement budget

Going from a full-time salary to a fixed income is quite a challenge. If you don't redo your budget to account for your lower income, you'll end up using your credit cards to make up the difference.

Here's the bottom line: You must live within your means. If you aren't, then take steps immediately to decrease your expenses. This might mean getting a cheaper car or checking into the possibility of getting a reverse mortgage to lower payments on your home. It's a good idea to use your credit card for rewards points or as a money management tool, but only if you can pay it off when the statement shows up at the end of the month.

#5: Getting into credit card debt during your retirement

First, stop using your credit cards. Then, take a good look at your situation and decide if you need credit counseling. If you're overwhelmed and feel like you're drowning in debt, contact the National Foundation for Credit Counseling to find a reputable counselor in your area.

If you've decided you can get out of debt on your own, proceed with caution. Many seniors in this situation think it's a good idea to use retirement funds to get out of debt. This really isn't a good idea unless you're so financially secure that decreasing the funds in your IRA won't jeopardize your ability to pay your other bills.

Remember, if you have $20,000 in debt and you're in a 25 percent bracket, you'll have to take out around $26,500 to pay the taxes on the withdrawal. This is a big chunk to take out of your retirement fund. Talk to your financial advisor before you do anything risky to get out of debt in a hurry.

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