Credit Score Tips for Investors
Investors know the importance of making every dollar work harder. They investigate stock picks closely, evaluate real estate opportunities from every angle, and maintain a diversified portfolio at all costs. But what about credit scores?
Many savvy investors don’t understand how their credit standing can impact their overall finances. And in turn, many don’t understand the impact their investments could have on their credit scores.
Why does credit matter?
Credit scores have become the default mechanism for evaluating consumers across a wide spectrum of industries. Your credit score is used with nearly every application for loans, credit cards, home insurance, car insurance, utility accounts, apartment/home rentals, or cell phone accounts. Current accounts are also impacted by changes in your credit scores. Credit card companies check your credit standing routinely to determine if your APR or other terms need to be changed.
Even small issues with your credit scores could translate to thousands of dollars lost to higher rates and fees. Investors are uniquely positioned in that their high levels of financial activity demand good credit, but at the same time they are at a higher risk for credit issues.
What credit issues do investors need to watch for?
Investors often don’t use their money in the same way as standard consumers. Credit scoring models are not designed to interpret these unusual behaviors and this can translate into lower credit scores. Here are some things for investors to watch out for:
Credit card debt: Floating large balances on credit cards – even if you pay the balance off in full each month – can be a significant negative for your credit score. Credit scores assign the most points to consumers who keep their total credit card statement balances below 10% of their total credit card limits each month. For example, if you have a total of $22,000 in credit limits, you never want to charge more than $2,200 a month on your accounts. This can be tough for investors and small business owners who use their personal credit cards for large transactions.
Applications for credit: Investors shopping for the best deal on a new credit account, bank account, or loan are at risk for damaging their credit with too many hard inquiries. Credit scores view high volumes of credit applications as risky consumer behavior. Try to keep your applications to a minimum, or group them together within a short period to reduce the score damage.
Opening and closing accounts: Credit scoring formulas prefer stable accounts that have been open for a long time. When you frequently open and close credit card or loan accounts you may be damaging your credit scores by making the average account age appear shorter. Account closures never have a positive impact on your credit scores.
Tax issues: Investors often face complicated tax issues related to various investments. A mistakenly unpaid tax bill can easily escalate to a damaging tax lien. Tax liens are the only negative record that can remain on your credit report indefinitely if left unpaid. Once paid, the record will continue to report to your credit reports for an additional seven years.
Identity theft and fraud: One negative record from an identity theft crime or fraudulent loan could cause severe damage to your credit score. If left undiagnosed, this sort of inaccurate negative record could cost you a significant amount of money and will only become harder to resolve.
How can good credit help you get ahead?
Having good or “prime” credit scores can help investors save money. A credit score over 750 is currently considered very good and will help you qualify for the best rates and deals available. For example, if you were buying a $200,000 property with a 30-year fixed rate mortgage, you could save over $30,000 by having a credit score above 720 instead of a score in the 675-700 range. The savings grow when you consider that a higher credit score would also mean lower credit card APRs and cheaper home and auto insurance.
What do investors need to do?
The most important step for investors to take is simply get into the routine of checking their credit reports and credit scores regularly. This can be done manually by ordering data from all three credit bureaus every 6-12 months. Or, an easier approach is to subscribe to a comprehensive credit monitoring program that will track credit over time and alert you to any important changes. These credit monitoring programs also come with the added protection of identity theft insurance.
Once you have a good idea of where your credit reports and credit scores stand, read our article about achieving the perfect score for tips on getting ahead.