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High Net Worth and Low Credit: What Gives?

Credit Score, Personal Finance
High Net Worth and Low Credit: What Gives?
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You can have little income and lots of debt and have a great credit score. Or you can have a very high net worth and a poor score. What gives?

Here’s what you need to know about net worth as it pertains to your credit.

What’s in a credit score?

A FICO credit score, the most widely used type, is generated from information on your credit reports and is made up of five factors: payment history (35%), credit utilization (30%), length of credit history (15%), types of credit in use (10%) and new credit (10%).

VantageScore, FICO’s main competitor looks at payment history (extremely influential), age and type of credit (highly influential), credit utilization (highly influential), total debt (moderately influential), recent credit behavior and inquiries (less influential), and available credit (less influential).

Your net worth, income and assets don’t affect your credit score

As you can see, your net worth isn’t factored into either scoring model, nor is your income or the assets you own.

A good credit score means that you pay your bills on time and use only a small portion of your lines of credit, and have done so over a long period of time.

High net worth doesn’t mean credit responsibility

While a high net worth may mean that you’re financially responsible, it doesn’t mean that you’re responsible with credit. If your net worth is high, but your credit score is low, there may be several reasons why. Assuming you don’t have negative events like bankruptcy in your past, here’s why your score might not be up to par:

You miss payments sometimes. As noted above, payment history is the No. 1 factor in your credit score. This means that you need to make all of your payments on time, 100% of the time.

Because your net worth is high, we’re guessing that the problem isn’t the availability of funds to pay these bills, but rather the organization necessary to get them paid on time. To fix this, set up automatic payments or reminders on your phone to ensure your bills don’t slip through the cracks.

Your credit utilization is too high. If you’re carrying a balance on your credit cards from month to month, or running up a large amount compared to your credit limit and paying it off each month, your utilization may be higher than recommended. Depending on which case describes you, we have two potential solutions:

  • If you’re carrying credit card debt from one month to the next: There’s no reason to carry credit card debt when you have a high net worth. Consider liquidating non-retirement and non-emergency savings to pay off credit card debt. Boom, you’re credit card debt-free!
  • If you pay your balance off each month, but your monthly balance is high in relation to your credit limit: Balances are often reported in the middle of the billing cycle, so your utilization could be very high even though you pay in full every month. You can request higher limits, incur smaller balances or make more than one payment per month.

Try to keep your credit utilization below 30% at all times, and lower is even better.

You haven’t been using credit long. If you’re new to the world of credit, it’s going to take time to build a good score. The best thing you can do is practice responsible credit habits and be patient. If you’re doing everything else right, your score will catch up.

You’re opening new credit like it’s going out of style. When you take out new credit, two important things happen to your credit score — you incur a new credit penalty and your average length of credit history decreases. The lesson: You should refrain from applying for and opening too many credit accounts at once.

Your credit report contains errors. Because all of the data used in your credit score is pulled from your credit report, it’s crucial that your report contains accurate information. Pull your credit reports — one from each of the major credit reporting bureaus — once per year to check them for discrepancies. If you find an inaccuracy, dispute it.

This article was updated July 8, 2016. It originally published Feb. 11, 2015.