Portfolio Management

Navigating the World of Credit: Tips for Building and Maintaining a Good Credit Score

Savvy

January 11, 2024

#Savvy

Navigating the World of Credit: Essential Tips for Building and Maintaining Good Credit

Your credit history and scores play a vital role in your financial life. Good credit can save you money through lower interest rates and provide flexibility to pursue investments and opportunities. On the other hand, poor credit may restrict your access to affordable financing or result in paying higher rates. That's why it’s essential to understand credit and take steps to build and maintain a strong credit profile. This guide covers key strategies tailored for high net worth individuals.

Why Credit Matters, Even for the Wealthy

You may wonder if good credit really matters once you’ve accumulated significant assets. However, lenders still examine credit scores and reports to make decisions, even for high net worth borrowers⁹. Favorable credit can provide advantages such as:

Access to the most competitive interest rates on mortgages, securities-based lending, lines of credit, and other financing vehicles commonly used by high net worth individuals² ¹⁵. Even a small rate difference can equal huge savings over the lifetime of a loan.
Flexibility to leverage credit to capitalize on timely investments and business opportunities as they arise²^.
Mitigating complications or delays for financing co-signed loans (e.g. for children) or piggybacking on corporate credit¹².
Avoiding large security deposits required by landlords and utilities for applicants with poor credit histories²³.

In short, maintaining excellent credit should be an integral part of wealth management planning for high net worth individuals.

Monitor Credit Reports and Scores

The first step is monitoring your credit data from Equifax, Experian, and TransUnion to catch any errors or suspicious activity.

Obtain free credit reports weekly from AnnualCreditReport.com¹⁹. Review carefully to dispute inaccuracies with the bureaus. Errors can negatively impact credit scores if left unaddressed.
Check your FICO credit scores monthly using free tools¹. Tracking scores over time shows progress and helps catch problems early.

Consider signing up for a credit monitoring service to receive alerts about critical changes to credit reports that may indicate fraud or identity theft.

Use Credit Strategically

With high credit limits and ample assets, avoiding credit cards altogether may seem sensible. However, strategic credit card use demonstrates responsible management of revolving credit.

Put everyday expenses on credit cards and set up autopay to pay statement balances in full each month⁴. This builds a positive history without paying interest charges.
Maintain open credit card accounts, including old accounts. Having open revolving accounts with higher age contributes to credit mix and history¹ ¹⁴ ²³.
Request credit line increases periodically from issuers if you have cards used frequently⁵. Higher total limits help keep utilization low.
Apply for new credit only when needed and with care to avoid unnecessary hard inquiries¹⁴. Each application causes a small, temporary score drop.

Additionally, utilizing installment loans (e.g. mortgages, securities-backed lending) also establishes a strong credit mix¹.

Increase Credit Limits

A major scoring factor is credit utilization - the ratio between account balances and total available credit. To keep this ratio low:

Call credit card issuers annually to request higher limits on frequently used cards⁵.
Consider applying for new cards periodically, which boosts total limits. However, apply judiciously to limit hard inquiries⁶.

Higher limits allow you to maintain the same balances while improving your utilization ratio.

Avoid Common Credit Traps

There are also actions that can jeopardize strong credit:

Carrying balances month-to-month leads to interest charges and higher utilization. Pay down balances quickly if you must carry a balance for one month¹^.
Maxing out credit cards or having high utilization negatively affects scores1. Keep individual and total utilization below 30%.
Make on-time payments to avoid late fees and score drops¹⁴. Set payment reminders if needed.
Be cautious about closing old credit card accounts as this can shorten your credit history¹. Leave accounts open if there are no annual fees.

Leverage Relationships

For high net worth individuals pursuing specialized lending, private banks and wealth management firms cater customized products and services² ⁹ ¹⁵. These institutions understand complex financial situations and can offer favorable terms and flexibility. Leveraging such relationships enables access to capital needed for investments and wealth creation.

Monitor Diligently

Consistently monitoring credit data and strategically managing your profile lays the foundation for strong credit. Excellent credit means qualifying for the best lending rates and terms when financing major purchases or capitalizing on investment opportunities. By staying vigilant and addressing issues quickly, you can detect fraud early and maintain access to credit that supports continued portfolio growth.

Maintaining Strong Credit

Once established, ongoing habits are required to maintain high credit scores over the long-term²³. Here are key practices:

Pay Bills on Time

Payment history is the most impactful scoring factor, comprising over one third of scores¹ ¹⁴ ²³. Set up automatic payments and reminders to avoid late payments.
If faced with financial hardship, contact issuers quickly for assistance programs to avoid score drops from missed payments¹¹^.

Keep Credit Balances Low

High revolving utilization damages credit scores¹ ¹¹ ¹⁴. Keep individual and total utilization under 30% for optimal scores.
Pay down or pay off card balances just before the monthly statement date/billing cycle¹⁷. This keeps reported balances low.

Retain Old Accounts

Keep old credit card accounts open instead of closing them¹ ¹⁴ ²³. Long credit history contributes significantly to scores.
Use old cards periodically to keep them active and show ongoing responsible usage¹⁴.

Check Credit Reports

Review credit reports frequently and dispute any errors with the bureaus right away to maximize scores¹ ¹⁴. Errors could negatively impact your profile if left unchecked.

Apply for New Credit Carefully

New credit applications usually result in hard inquiries and temporary score drops¹⁴ ¹⁷. Only apply for credit when truly needed to limit inquiries.

Conclusion

Vigilantly monitoring credit, establishing positive history, and leveraging relationships are key for high net worth individuals to build and maintain strong credit. Excellent credit scores qualify you for the most favorable interest rates and terms when financing investments or capital assets. By proactively managing your credit profile, you ensure flexibility in accessing capital critical for continued portfolio growth and wealth creation.

‍

References: