If you consider yourself “rich??? you may ask yourself this question from time to time: why am I not paying for everything with cash? While you may think this is a good idea, there are many reasons for considering your other options.
Simply put, rich people, just like everybody else, still need credit. There is no reason to believe that just because you have a lot of money that credit has no place in your financial life.
A Credit History is Important
Unless you are the type of person who is earning millions upon millions of dollars per year, there is a good chance that a credit history will come in handy at some point in time.
From applying to a top of line, exclusive credit card to obtaining a jumbo mortgage, you’re still going to need a strong credit history if you want to be approved.
It does not matter how rich you are, if you don’t have a solid credit history and credit score you will not receive the best interest rate on a loan.
Rich People Take Out Loans Too
It is easy to believe that all rich people pay with cash, even if they are making an expensive purchase like a home or car. However, nothing could be further from the truth. Just like “average, everyday people??? those with a lot of money often times take out a mortgage or car loan as well. Just because they are rich, doesn’t necessarily mean they have enough cash on hand to pay for an item like a house or car. Usually wealthier individuals and families keep their money tied up in dividend producing assets or interest bearing bonds or bank deposits.
Without any credit history, getting a loan is going to be a challenge. Even if you do qualify, obtaining a competitive interest rate can be quite difficult. This has nothing to do with your income, but everything to do with the details of your credit report.
You Have Questions, We Have Answers
Some people have a difficult time wrapping their head around the fact that rich people don’t always pay with cash. This leads to many questions, such as:
1. Why would somebody apply for a mortgage when they could easily pay with cash? There are many potential answers to this question. First off, some people prefer to invest their cash in other ways as opposed to paying for a home in full upfront.
Another huge benefit is the home mortgage interest deduction. It is easy to believe that rich people never think twice about paying taxes, but nothing could be further from the truth. These people want to save just like everybody else – this is one reason why they have so much money.
2. Do rich people use the same credit cards as everybody else? Credit is credit, for the most part. That being said, there are some credit cards that rich people flock to like hot chocolate on a cold winter day. These include but are not limited to
- Coutts World Card
- American Express Platinum Card
- American Express Centurion Card
- American Express Citi Chairman Card
- Bank of America Accolades Card
What sets these credit cards apart from the rest? First and foremost, the annual fee is something that most people aren’t willing to pay. For example, the American Express Centurion Card has an annual fee of $2,500. For somebody in the top tax bracket, this is nothing.
Although the rich are willing to pay this annual fee, they get a lot in return including: personal concierge service, first class upgrades, VIP access to special events, and much more.
3. Is it even possible for the super rich to have a bad credit score? The short answer is yes. Remember, your credit score has nothing to do with the amount of cash that you have in your bank account. Instead, this is based on factors such as how much debt you have, whether you pay your bills on time, etc.
Think about it this way: every year, many celebrities and athletes let their home go into foreclosure. Some of these people are among the richest in the world. But just like everyday people, a foreclosure is one of the fastest ways to kill a good credit score.
The Benefits of Shopping with a Credit Card
Why would rich people want to use cash when they could take advantage of all the benefits associated with a credit card? After all, these people are in position to payoff the balance in full when their statement arrives.
Here are several benefits associated with using a credit card as opposed to paying with cash:
- Security. When you carry cash, you are an easier target for criminals. On top of this, there is nothing you can do if you lose your money. With a credit card, things are much more secure.
- Reward program. No matter how much money you have, there is nothing like getting free stuff. With a credit card reward program, you earn points for every dollar spent. If you use your credit card often, these points can add up in a hurry.
- Let your cash make money for you. As long as you are willing to payoff your balance in full when your statement arrives, you can leave your cash in accounts that are actually earning you money.
No matter how much money you have, a solid credit history and score is a must. This holds true even for the rich.
This is a guest post by Dan Nelson. Dan is the owner and primary author at BankVibe.com. You can follow him on twitter @Bank_Vibe.