Everyone has a credit score, but not everyone understands just how they are determined. High-net-worth individuals can find themselves shocked when they apply for a loan and discover they aren’t approved because of a low credit score. Even HNWIs need to know what their credit score is, how various actions affect it and alternative options for financing if their score is low.
Finance Factors That Make a Difference
Basically, credit scores are determined by five main finance factors. Each of these factors carries a specific weight and is combined with other variables using a complicated (and very secret) algorithm. These five factors and their weight are as follows:
- Payment History (35%)
- Utilization (30%)
- History Length (15%)
- Types of Credit in Use (10%)
- New Credit (10%)
According to Credit Karma, no one factor in a credit score can work independently from the others, meaning it’s important to pay attention to all of the factors when looking at credit scores. Properly managing each aspect of one’s credit, makes it possible to gradually build or repair a credit score.
Payment history is, hands down, the finance factor that is most heavily weighted in a person’s credit score. It accounts for approximately 35% of the score. With high-net-worth individuals, there are often numerous accounts open at one time and, more often than not, it’s not a matter of having the finances to pay the bills, it’s a matter of remembering to pay them on time. This can potentially affect their score in a big way. Depending on the individual’s situation, finding better ways to manage due dates is an essential step to a healthy score.
Credit Card Utilization
Credit card utilization is the second most heavily weighed finance factor in a credit score. Accounting for 30%, minor changes can make a big difference. This percentage of a credit score is determined by the amount owed in proportion to the amount of credit available. Keep in mind, this is calculated by the amount owed when the card company reports to the agencies, not the balance that is carried over each month. By regularly keeping credit card balances low, and paying the balance off each month, it is possible to maintain a higher credit score.
This is another area where high-net-worth individual’s credit score could be impacted. Because they have an abundance of discretionary income, these individuals are potentially high spenders. If this is the case and they aren’t regularly paying off their balance, it would have a negative effect on their score. Even if these individuals are paying off their balance every month, they may still be maxing out their credit line which, would have the same adverse effect on their credit score.
Length of Credit History
This finance factor finds an average age based on every account open. This factor accounts for 15% of a credit score and includes:
- Credit card accounts
- Mortgage accounts
- Auto loans
- Student loans
- Any other lines of credit
It is for this reason, that it is ill-advised to close a credit card account that has been open for quite some time. This can have a significant negative affect on a credit score by reducing the available credit and average length of history as well as increasing the utilization percentage.
New Credit and Types of Credit in Use
These two finance factors each account for 10% of a credit score. The total number of accounts can attest to an individual’s credit worthiness, however, having too many new accounts can be reflected negatively when a lender is considering approval. It is recommended that applications for new credit are selectively submitted over a period of time. If a high-net-worth-individual does not demonstrate restraint when it comes to opening new lines of credit, they could fall victim to credit score demotions due to these factors.
What isn’t Included in a Credit Score?
Some high-net-worth individuals might be surprised to find that income, assets and net worth are three finance factors that aren’t included in a credit score. According to Spear’s and James Jones of Experian, finance records track and record debt, not wealth and assets. This is how many high-net-worth individuals find they have a low credit score. Simply having wealth does not automatically mean a good credit score comes with it. Since high -net-worth individuals rarely have a need to carry many credit cards or a mortgage, they can find themselves with a shockingly low credit score. There are alternative finance solutions for high-net-worth individuals with a low credit score.
With companies like Borro, high-net-worth individuals can raise capital from luxury assets. Borro can help high-net-worth clients by offering three types of services: Sale Advance, Bridge, and Term Loans. These services can help high-net-worth individuals gain the funds needed in a short amount of time with the help of luxury assets. There are a variety of luxury assets Borro lends on, including:
- Fine art and antiques
- Classic and luxury cars
- Luxury watches
- Jewelry and diamonds
- Fine wine
- Luxury handbags
How Do Sale Advance Loans Work?
With a Sale Advance Loan, a high-net-worth client can get immediate liquidity for up to 70% of the estimated price of the asset. This way, clients don’t feel rushed into a sale. Low fixed-interest rates and a 15% – 20% sales fee allow clients to maximize the final sale price of the asset. All interest and fees are taken from the final sale amount after the sale of the asset, which leaves the high-net-worth client with nothing to pay up front.
How Do Bridge Loans Work?
Bridge Loans allow wealthy clients to use their luxury assets to secure funding on a short-term basis. There are no credit checks or income checks and once the Bridge Loan is repaid, assets are returned.
Funds can be deposited into a client’s account in mere minutes after they approve a loan offer from Borro. Bridge Loans offer fixed interest rates of 2.99% – 3.99% per month, giving clients a consistent monthly payment that won’t increase over time. Loans are generally for a 6-month term, but these loans can be repaid at any time, with no fees for early payoff.
How Do Term Loans Work?
A Term Loan is a longer term finance solution that offers wealthy clients 18-month, 24-month, or 36-month contracts for loans larger than $100,000. Term Loans have a fixed-rate interest that will never increase from month to month. This allows wealthy clients to secure a larger amount of funding for any financial need they may have.
Where will Luxury Assets be Stored?
Clients are likely to be concerned about where their valuables will be stored. All luxury assets are stored in a high-security, state-of-the-art storage facility, which are climate controlled, fully insured. Specialized facilities are used for fine art, cars, fine wine and jewelry and watches.
Finding the right company to assist with alternative finance solutions for high-net-worth individuals is important. Regardless what product a client chooses to take advantage of, their information and luxury assets are always protected. Borro is dedicated to taking every precaution in their security practices to make sure clients, their information and their assets are kept confidential and secure 24 hours a day, 7 days a week, 365 days a year.