How Can Rich People Have Terrible Credit?
Wealth can be subjective: is it money, happiness, or just financial stability?
Additionally, wealth separates many of us in life. If you’re low-income, you probably are working hard hours at mediocre jobs. If you’re middle-income, you might be living in a decent subdivision with a small family, and have a regular nine-to-five career. If you’re high-income, you might be living in a highrise in downtown, enjoying a glass of champagne with every meal.
It’s hard to imagine that high-earners could ever be in need of financial advice, but as it turns out, some of them are just plain poor financial planners. Just look at the celebrities who have filed for bankruptcy; some of them numerous times, even! How can people who are making well over $100k a year be so bad at managing their finances?
Let’s dive in and look at why rich people are occasionally very bad at finances, and why so many of them have a low credit score. Maybe we can even learn a bit about how to better manage our own money!
How Rich People Can Ruin Their Credit
It may seem like an oxymoron that rich people can be bad at handling money, but it’s actually quite common. Most of them have lived a high cost lifestyle for so long, that money is taken for granted. They spend, spend, spend, without considering the ramifications in the event that something goes wrong. Not only this, but some of them simply don’t consider the importance of up-keeping their credit score. Why worry about that when you have all the money you could possibly need? However, your credit score is not determined by income and wealth, but in your ability to repay your debtors on time.
One writer with Quora, Kurt Walker, noted the various ways in which wealthy people might neglect their credit score:
“It’s absolutely possible [for rich people to have bad credit scores]. We see it all the time. You wouldn’t believe how many doctors, lawyers and successful skill based professionals have this issue. Quite often it’s a combination of fast lifestyle combined with poor money management skills or discipline. Or even the classic American issue of spending more than we make and financing it.
I’ve also worked with folks who are quite wealthy and chose not to borrow or use debt leverage to build or buy the assets they have accumulated. As a result they may have little or even bad credit by choosing not to have much in the way of trade history. If you are an unknown to the banks and credit bureaus you’ll appear to have weak or poor credit regardless of actual wealth or assets.”
On top of all these possibilities is the additional threat of bankruptcy. Although wealthy individuals rarely file for Chapter 7 (where you lose all your assets to pay off debtors), Chapter 13 is much more common. They can file, sell off parts of their property or possessions, and then pay off their debts over time. However, it is sure to ruin their credit score standing, as Chapter 13 bankruptcy can stay on a credit report for up to seven years.
Credit Standing: What’s Wealth Got to do With it?
However, outside of your credit score, how likely are people to be approved for loans when they have a low score but a high income? Or what if you have a high score but a low income?
Although credit scores are the biggest determining factor for loan approval, lenders will often get an entire financial portfolio from the person who is applying for a loan. This means they will have insight into a person’s income, monthly expenses (rent, food, medical, bills, etc), and any outstanding debts. If the lender feels that a new loan would push the lender into dangerous territory, they will simply reject you. So if you are a low-income, but high credit score individual, you might still get rejected based on how much money you already owe not in debts, but basic living expenses.
High income earners, however, might be seen as less of a risk, as long as their current debt isn’t substantial. If mortgage payments for a high-income earner are over 43% of their monthly income, though, they might be rejected by a lender due to the high debt-to-income ratio.
Another aspect to consider is the down-payment. Most high-income earners might be able to put down 20% of the cost of a car or home, or even more. The higher the down payment, typically the lower the interest rate, which is also favorable to lenders. Liquid assets may also play a part in loan decisions, as they can help cover the cost of the loan in case they default. High income earners are more likely to have liquid assets; typically stocks or bonds, savings, or other bank accounts.
Finally, lenders are also interested in your employment history. They will dive into your current job, determine how stable your career is, and factor that into their decision. If a high-income individual is erratic with jobs and doesn’t have a stable background, they may be passed up for a loan, depending on the lender and the amount.
Don’t Be Like Some of the Rich
Income and credit score rankings can be slightly related, but also stand independent of themselves. This is made even more obvious when you consider how high income earners often have horrendous credit scores.
However, in the end, this goes to show just how important a good to excellent credit score can be for your personal finances. Even if your income is not within the top 5% of the country, you should always focus on improving your credit score. Debt can have a way of improving our lives if we utilize it wisely, and although income can have an impact on loan approvals, the most important factor is still our credit score.
Don’t be like some of rich folks and neglect your credit score over your income. Instead, be smart, make your payments on time, and work on improving your personal finances on a constant basis.
Image source: https://www.pexels.com/
Katie McBeth is a researcher and writer out of Boise, ID, with experience in marketing for small businesses and management. Her favorite subject of study is millennials, and she has been featured on Fortune Magazine and the Quiet Revolution. She researches SEO strategies during the day, and freelances at night. You can follow her writing adventures on Instagram or Twitter: @ktmcbeth
This post was updated June 23, 2017. It was originally published June 7, 2017.