If you’re like most Americans, you probably look forward to a life with guaranteed Social Security income after you retire. Each year, the Social Security Administration updates the estimated benefits you’ll receive so that by the time you retire, you’ll have a pretty good idea of how much you’ll get.
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But in some rare cases, your bad credit can affect the amount you actually receive in your checking account – and in really unfortunate cases, you could lose some of your payment even after you receive it. This isn’t a problem for most Americans, but if you have bad credit or outstanding debt, you’ll need to work to rectify that before facing a surprising reality after retirement.
The good news: there is (usually) no impact
Let’s start with the good news: In the vast majority of cases, your Social Security is considered a federal payment protected from creditors. Even if you have $100,000 in credit card debt, you don’t have to worry about anyone coming after your federal payments, as long as you make at least the minimum payments. In fact, even if you default on your credit card debt, in most cases, your creditors still can’t pursue your Social Security. However, there are certain cases where even your Social Security can be attached.
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The U.S. government generally considers federal payments to be untouchable by creditors – unless the government itself is the creditor. If you owe tax back or otherwise owe the federal government money, it can cut in and garnish up to 15% of your Social Security payments. The same is true if you default on a federal student loan. Court-imposed alimony or child support payments can amount to as much as 50% to 65% of your Social Security benefits.
In general, other creditors, such as collection agencies, do not have the right to collect your Social Security payments. But there are some tricky legal exceptions that can expose your payments to garnishment. For example, if you transfer your Social Security money to a segregated bank account or don’t spend it within two months of receiving it, that money can sometimes be fair game for garnishment creditors. Since this area can quickly become legally confusing, it is best to consult an attorney if you find yourself in this situation.
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Does your credit score affect the amount you receive from Social Security?
Your credit score does not directly affect the amount of money you receive from Social Security. The calculation of your Social Security benefits depends on two factors: the amount you earn during your lifetime and the age at which you apply for benefits. Whether your credit score is 540 or 850, it will not affect your Social Security benefit calculation. That being said, you’re obviously more likely to have a low credit score if you’re in a low-paying job, as it can be harder to pay off your debts; and if you have a low paying job, you will also generate a smaller Social Security benefit. So while there is no direct relationship between your credit score and your Social Security benefit, there is often a connection between the two.
It comes down to
A bad credit score is not something you need to worry about when it comes to receiving your Social Security payments. But bad financial behavior — such as back taxes, alimony, child support, student loans, or even consumer credit — can get your Social Security garnished. There is also a clear correlation between lower credit scores and lower income. If you earn a lower income, it means that your Social Security benefit will also be lower. So while your credit doesn’t directly affect your Social Security payments, there is an indirect link. If you’re struggling to make ends meet, it’s a good idea to discuss your options with your creditors and/or a financial advisor before creating a long-term problem.
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This article originally appeared on GOBankingRates.com: Social Security: Will Bad Credit Hurt Your Benefits?