7 Credit Card Mistakes Even the Rich Make
You might think that just because somebody is rich, they make all the right decisions. Not so. In fact, the rich can be vulnerable to financial flubs too. Maybe it’s the cavalier attitude that they can afford mistakes. Or it’s an assumption that only people who live paycheck to paycheck have to pay attention to the details.
Where they may go wrong is how they manage their debt (yes, you can fall into the well-off category and still have a need for loans and credit cards). It’s so easy to get comfortable when you’re sitting on a cushion of wealth, but if you get too comfortable and think you’re too wealthy to keep track of your credit risk, you could end up chipping away at those riches. Here are seven ways the wealthy risk their wealth by acting unwisely with credit.
- They think interest rates aren’t important.
Why this is a mistake: “Interest rates matter no matter how fat your wallet is,” says Shannah Compton Game, a certified financial planner. Even if you have smartly paid off your balance every month, there’s always the risk you’ll inadvertently miss a payment.
To get rich and stay smart: Everyone should pay close attention if a credit card company announces it’s raising your APR. Assuming you are usually good with your payments, know your credit rights, and have a good credit history, the company may back down on that change if you call and state your case.
- They think they’re too good for rewards.
Why this is a mistake: It makes no sense to spend money on your credit card and not get something in return. Rich people may overlook this. Get something for the money you are spending. There’s no reason the jet set shouldn’t be cashing in on all that travel, earning points for yet more travel, dining and all manner of fun. “You don’t get the Cracker Jack box for the caramel corn; you get it for the prize inside. Make sure you are maximizing rewards,” says Compton Game. The wealthy big spenders have the ability to rack up points quickly.
To get rich and stay smart:: If you don’t use rewards points, you’re essentially giving away money (cash back) and perks. For sure, that’s not how you accumulate wealth.
- They forget to pay their bills.
Why this is a mistake: Unlike the average Joe or Jane, it’s not that rich people don’t have money to pay their bills. A missed payment can easily occur simply because they were too busy, perhaps while vacationing in Saint Moritz or Fiji, or maybe they’re disorganized because they have so many commitments and their pile of bills is low on the priority list. Late payments are a much bigger deal than people realize. Thirty-five percent of your FICO credit score is based in large part on whether you pay your bills on time. One late payment can have a serious impact on your credit scores. Make a habit of being late and watch your credit score dive, and in the future, you can expect creditors to penalize you with higher interest rates and less favorable terms on financing.
To get rich and stay smart:: The easiest thing in the world for the wealthy – and anybody for that matter – is to set up automatic payments for at least the minimum payment amount. That way you don’t have to worry about forgetting.
- They don’t monitor their credit report.
Why this is a mistake: Many rich people don’t monitor credit card spending because of their income status. Credit scores do not rely on income or net worth as a criterion, so it is even more critical for the wealthy to monitor their spending and credit reports. If you have multiple credit cards with large limits, more than one mortgage loan, business loans, or other debt, your high balances may be viewed as a financial risk, which can lower your credit score.
To get rich and stay smart:: Credit reports should be checked at least once a year and at least three months prior to a major purchase, like a car. It is also a good idea to check your credit report to ensure you are not a victim of identity theft. Rich people in particular are targets for scams and identity theft.
- They forget the rule about not co-mingling business and pleasure.
Why this is a mistake: “Don’t use your business credit card like a debit card,” warns Harrine Freeman, author of How to Get Out of Debt: Get an “A” Credit Rating for Free. Business credit cards that are issued in the name of an individual succumb to many of the same risks as traditional credit cards. Entrepreneurs who go crazy racking up expenses on the business credit card could hurt their company’s reputation and its credit score, which could affect its ability to borrow in the future. Many credit card issuers require applicants (small business owners) to be personally liable for their small business credit card.
To get rich and stay smart:: Keep your business expenses separate from your personal expenses, even if that means two separate orders at the Staples checkout. Don’t charge personal items on your business card; only use your business credit card for items related to your business.
- They leave their negotiation skills in the boardroom.
Why this is a mistake: You may be a tough negotiator when it comes to business, but wealthy people sometimes forget to carry that into their personal lives. “Negotiate like Rockefeller did,” says Freeman.
To get rich and stay smart:: If you have a good or excellent credit score, use it to negotiate for reduced interest rates, perks, reduced fees, or fees waived.
- They dismiss the importance of debt utilization ratios.
Why this is a mistake: Debt utilization is a mouthful to even say. But it is something to keep in mind, and you should have a healthy respect for it. Thirty percent of your credit score points is based on your “debt utilization” ratio. It’s your total credit card limit compared to the balance of your total credit card debt. You start damaging your credit score when this ratio exceeds 10%. For example, if you have $55,000 in credit limits on your credit card accounts, you never want to charge more than $5,500.
To get rich and stay smart:: Because this formula uses the statement balance, you can still harm your credit score even if you pay off the amount in full each month. Wealthy consumers who spend large amounts on their credit cards each month have a high risk of damaging their credit. Going over 50% utilization could easily lower your credit score by 100 points.