Elevate research shows that 15% of people with less than optimal credit scores earn an individual income of more than $100,000 per year. Additionally, new data from CreditCards.com shows that while credit card debt is most prevalent among the lowest income earners, 37% of those with a month-to-month balance earn at least $100,000 a year.
“Even wealthy people can have less than ideal credit for all sorts of reasons,” says John Campbell, head of wealth planning for the East region of US Bank Private Wealth Management. Yet having a better credit rating can make a significant difference in their purchasing power. “That could have an impact, even for those who may not be struggling with a particularly low credit score,” Campbell says.
Sometimes advisors avoid the topic because they mistakenly believe that clients, especially wealthy ones, aren’t plagued with credit issues. But financial advisors who help customers with credit problems offer significant added value that can have lasting benefits.
Working with customers on credit-related matters is particularly relevant now, as two in five people believe they will need to rely on credit to cover essential and unexpected expenses over the next three months, according to a survey in august by
Additionally, two in three expressed some concern about the negative impact of their credit score on their ability to access credit during the same period, according to the Experian survey.
Here are eight ways counselors help clients overcome credit issues.
Provide education. Advisors should tell clients that credit scores are usually between 300 and 850. A good credit score is 670 to 739 on the FICO Score range, while a credit score of 661 to 780 is good on the VantageScore range, according to Experian.
Then, advisors can help clients understand the factors that go into a strong credit score and offer ideas to help them achieve one. These factors include payment history, credit usage, credit history and credit mix, says Campbell.
Determine what went wrong. Financial advisors say clients are sometimes surprised to learn that their credit isn’t as stellar as they thought. This often happens when they apply for a car or home loan and are offered higher than expected rates. They don’t always know why they have the score they do or what they can do to improve it.
The culprit could be mistakes in the person’s credit report, irresponsible financial behavior early in their career, or job loss. Or maybe they’ve fallen behind on some bills or haven’t established a solid credit history. This is where advisors can have the most impact: digging deeper to help uncover the roots of the problem, then suggesting fixes to put clients on a better path. Even small changes can make a big difference in a client’s credit score, counselors say.
Correct the mistakes. Mistakes can easily derail your credit. That’s why Jeffrey Bush, managing director and chief financial officer at Informed Family Financial Services in Norristown, Pennsylvania, suggests everyone carefully review their credit reports to make sure they’re accurate. Mistakes, or worse, identity theft, can negatively impact a person’s score. That’s why people are advised to check their score with each of the three major credit reporting agencies—
and Experien—once a year, which they can do for free by visiting www.AnnualCreditReport.com. They can also monitor their credit more regularly by signing up for free or paid credit monitoring services.
Establish good habits. Some customers find it difficult to get lower credit because they weren’t careful to pay their bills on time. For those customers, Brian Seay, founding partner of Capital Stewards in Madison, Alabama, recommends that they settle their bills on autopay. That way, they’ll be sure to pay on time, which will help improve their credit score, but there can be issues, so people should be sure to watch out for the fees they accrue. Some advisors also offer bill payment services.
Provide appropriate tools. People who cringe at the thought of budgeting may find it difficult to do so on a monthly basis, so automating their finances could be a helpful tactic. Invoice automation, however, would be unlikely to succeed with someone hyperaware of planning and control. For advisors, understanding these nuances can be key to providing the best advice possible to help clients improve their credit rating. “It’s important to know what kind of person they are so that you can help them succeed and come up with programs or ideas that will help them succeed in the long run,” says Jonathan Walker, executive director of the Elevate’s Center for the New Middle. Class, which focuses on consumers with credit scores below 700 and those with little or no savings.
Elevate offers a free online Money Mindfulness tool that helps people understand their money values and identify key financial goals they want to work on. Sharing these results with their financial advisor can help the advisor better strategize moving forward, Walker says.
Consider consolidation. Campbell also recommends that clients consolidate or refinance higher interest rate debt, if possible. If they have variable interest rates that can be converted to fixed rates, that might be prudent, especially in a rising interest rate environment, he says.
Reduce debt. Another sticking point for many consumers is the use of credit. According to a recent study by
This is above the generally recommended limit of 30%.
When people have large balances on their credit cards, it is sometimes advisable to pay off the card with the highest interest rate first. But from a credit score perspective, it’s advisable to focus on reducing credit balances so they’re below the 30% threshold, Seay says. He recommends paying one card up to 30%, then moving on to the next card and so on. “It’s a really good way to improve your score fairly quickly,” he says.
Build credit. Credit issues can take time to resolve, but helping customers create a plan can be essential.
Seay gives the concrete example of a married doctor who was dismayed to be offered a much higher than expected rate on a car loan. This is true even though she and her husband had a combined income of over $500,000. As a starting point, Seay recommended that the wife become an authorized user of the husband’s credit cards to help boost her credit score, which was around 660. A few months later, they bought a house and she was listed on the mortgage, another credit- building tactic.
“You need to have access to credit to have a higher credit score,” he says.
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