Credit Mistakes Wealthy People Make
Wealthy people don’t worry about their credit scores. Well, let’s rephrase that: Wealthy people who don’t worry about losing money don’t worry about their credit scores. If you have a couple grand to waste every year, go ahead and don’t pay attention to your credit if you so choose. But as for the rest of us…we need to start paying attention.
The stakes are higher for wealthy consumers: A bad credit score can translate to a lot more lost money. And to make matters worse, there are five mistakes that wealthy people commonly make when it comes to their credit:
- Overusing credit cards – One of the biggest credit score factors is also the least well known: 30% of your credit score points are based on your “debt utilization” ratio. This is your total credit card limit compared to the balance of your total credit card debt. You start damaging your credit score when this ratio exceeds 10%. For example, if you have $45,000 in credit limits on your credit card accounts, you never want to charge more than $4,500.
Because this formula uses the statement balance, you can still harm your credit score even if you pay off the amount in full each month. Wealthy consumers who spend large amounts on their credit cards each month have a high risk of damaging their credit. Going over 50% utilization could easily lower your credit score by 100 points.
- Ignoring credit – Wealthy people may avoid checking their credit regularly, thinking that it isn’t something that is important for their finances. But wealthy or not, it is crucial for everyone to check their credit reports and credit scores every 6-12 months. A low credit score could be costing you hundreds or thousands of dollars on credit and insurance products.
Plus, it isn’t just your own credit charges you need to worry about. Identity theft is rampant and often only detectable through a credit check. And credit reports are notoriously full of simple clerical errors. Your credit could be damaged from a crossed record belonging to someone with a similar name.
- Thinking income impacts credit – Credit scores don’t know that you’re wealthy. Your income and net worth are not a factor in your credit standing and are not recorded on your credit reports. Your credit score only looks at how responsibly you manage your credit and loan accounts…not how much your portfolio is worth.
When you consider that your income isn’t recorded, your credit report may suddenly seem quite different. Credit report records such as jumbo mortgages, multiple credit cards, and high debt balances may be interpreted as a sign of financial risk, instead of typical spending habits of the wealthy.
- Business card blunders – Business credit cards can be an excellent way to track spending and earn rewards for your enterprise. Unfortunately, these accounts are most often issued directly to the cardholder instead of to the business. This means that you will be held personally responsible for the account and it will appear on your own credit reports. Any late payments or issues with the business account would harm your credit. And, going back to the first mistake of overusing credit cards, having a business credit card with a high balance can be very damaging to your credit scores. Not all business credit cards report to the credit bureaus, so you should check your credit reports to see how your accounts are presented.
- Not using credit to negotiate the best deals – A high credit score can be an incredible negotiation tool. Always check your credit scores before a major purchase to see exactly where you stand. You can work out reduced prices on auto loans, home loans, credit cards, or insurance policies by leveraging your credit scores. If you go in armed to the negotiation, you can be sure you are getting the best deal possible.
Are you making one or more of these credit mistakes? Check where your credit reports and credit scores stand with Equifax, Experian, and TransUnion. Give yourself the best financial advantage by taking control of your credit scores and avoiding these common mistakes.