Credit Secrets of the Rich

The top 5% of American taxpayers own half the wealth in this country. 3% of Americans know their credit score. Any guesses how much of that 3% falls within the top earning category? Probably almost all.

Want the secret to being rich? Act like a rich person. And no, that doesn’t mean spend like one (yet).

It means use the financial fundamentals that all rich people employ but most middle and lower income people ignore, either out of fear or ignorance. The best part is that it doesn’t have to cost a cent.

Secret #1 - Get Your Free Credit Report

It’s absolutely free to view your personal credit report. Every one of your creditors has seen this document so why not you? Shouldn’t you know what’s being said about you?

By law you can check your reports at the top 3 credit bureaus once a year for free. Please exercise this right. You need to know where your credit stands so you can begin improving it – and leveraging the benefits of great credit. So go to the government mandated annualcreditreport.com to claim your free credit reports now. If you’re a total cheapskate, you can even get your 3 credit scores free (which you ordinarily must pay to see) by signing up for a free credit monitoring trial from 7 to 30 days. Here’s a list of the top credit monitoring services. (Just remember to cancel before your time is up or you’ll be charged.)

Your credit scores are vital…why? It’s not paranoid or conspiracy-loving to point out that your credit report and accompanying score have everything to do with the rates you’ll pay for most financial services including:

  • Home loans
  • Car loans
  • Insurance
  • Credit cards
  • Personal loans
  • Home equity loans

You can pay a little or a lot. It’s your choice. The secret is in your credit score which you earn every day.

Secret #2 - Know the Score

The credit world is a meritocracy. Those who pay on time and use credit wisely receive the best credit scores and preferential treatment. That comes via generous interest rates and loan terms which could easily add up to hundreds of dollars saved every month.

Look at the potential payment difference for various credit scores on a $200,000 mortgage:

Credit Score: 550 650 750
Monthly Payment $1643 $1339 $1195
Savings: 0 $304 $448

Once you realize how much a bad score can cost, it becomes imperative to pull your score up. And one of the top credit score villains is the lowly credit report error. These are so common that it’s estimated that close to 80% of reports have errors* (source: U.S. Public Research Interest Groups). Not all errors have credit-wrecking properties, but as many as 20% can cost you money, or cause you to be denied for a loan. Errors might include paid-off accounts that mistakenly show as overdue, information from another person’s file reported on yours, etc.

Secret #3 - Follow Through

Anyone can make plans – the rich take action. If you find errors on your reports (they should be easy to spot), it’s no big deal to dispute them with the credit bureau. All 3 bureaus allow you to run disputes through their websites or you can call them on the phone. It’s free. It takes just minutes to start the process.

While you’re cleaning up your reports (which may take up to 60 days), resolve to take the number one action which will improve your credit score: Pay all bills on time. Most people simply do not realize the negative effect that even a single late payment may have. Because current behavior counts more than past history in your credit report, within 6 months of on-time payments you should see your credit score rebound. Many people assume fixing their score takes years – it doesn’t.

Secret # 4 - Live Within Your Means

Of course, most people don’t intend to pay late. They are just financially overstretched and don’t have enough left over to pay their bills promptly. This is a credible excuse with unplanned medical bills, injuries which keep you from working and other life hardships. But for many people, the problem is one of overspending and a confusion of desires with necessities. Food and shelter are necessities; satellite dishes are not.

The simple truth, which any money manager will reveal, is that rich people live within their means. They don’t spend more than they make; this is how they accumulate wealth. Rich people don’t buy things on credit that they can’t pay for in cash – they don’t use credit as a lifestyle enabler. While they are accumulating their fortune they trade short term gratifications for longer term pleasure – the enduring pleasure of wealth and security.

Make a list of all the non-necessities you would need to cut from your monthly nut in order for you to run profitably each month. (Hint: you can usually save hundreds immediately by cutting monthly entertainment costs such as cable/satellite, dining out, magazines and social coffee get-togethers.)

Secret #5 - Use Information to Your Advantage

The rich are gifted at using information to benefit themselves. For example, they realize that as their credit scores rise they become more desirable to lenders. That means people will compete for your business, which gives you leverage. Once your credit score passes the 700 mark, you should be able to negotiate better interest terms. Call your credit card issuers and request a better interest rate (this works best if you are current on your bill).

Many customer reps are empowered to give lower promotional rates to customers if they ask. Offer to make that company’s card your primary card (the one you will use the most) if they will reduce your interest. If they don’t budge, ask them what they will do to retain your business. Request to speak with a supervisor. If you don’t receive a deal you like, go elsewhere and inform the company that you are doing so (another pleasure of being rich).

As your score nudges past 720, you can afford to choose your lenders rather than the other way around. Shop for auto loans, new insurance, refinancings – all creditors will compete for your business and offer you premium deals. Once your loans and credit reflect these renegotiated rates you will save thousands every year.

As you enjoy the benefits of great credit, don’t forget that the rich understand that they should never carry a $0 credit balance (lenders like to see some credit usage) OR carry more debt than 30% of their total credit limits (all cards put together). This “credit utilization ratio” carries tremendous weight in computing credit score and you won’t see the rich exceed it.

Secret #6 – Continue Learning

Finally, the rich don’t rest – they keep seeking out new opportunities and new information. They ask others for financial insight. They read books on building wealth like The Automatic Millionaire by David Bach. They stay on top of their credit by checking it yearly – for errors, for I.D. theft and for knowledge. Most of all, they never, ever leave wealth to chance.

In your financial life, few things figure as prominently as your credit report and credit score. Learning the basics of the credit report process, and keeping your credit report free of errors, is essential to good financial health. You should focus on improving your credit score as the highest credit scores receive the best interest rates and loan terms. On a mortgage, a difference of 100 points could be worth hundreds of dollars each month.

Since 2005, all Americans have the legal right to obtain a free annual copy of their credit report from TransUnion, Equifax and Experian credit reporting bureaus. This law is intended to help consumers reduce errors in their credit reports by minimizing the obstacles to viewing credit reports. To receive a free credit report visit the official site run by the bureaus: annualcreditreport.com

Your personal credit score is a number from 350-800 which stands for your credit risk. The higher numbers are considered less likely to default. Credit scores come from mathematical formulas that measure many variables in your credit report such as payment history, public records, and debt to income ratio.

The Fair and Accurate Credit Transaction Act (2003) amendment to the FCRA Fair Credit Reporting Act guaranteed all Americans the right to see their credit report once a year to check it for errors. To learn more about free credit, credit scores and financial terminology, visit our glossary page.

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