How a successful person can have a bad credit score

a woman pays for an online purchase with her credit card

Common mistakes the wealthy make that can ruin their credit score

One of the interesting things about a good credit score is that, for the most part, anyone can earn one. It’s not impacted by factors like your education, salary or generational wealth. So when you think “perfect credit score,” it’s not necessarily going to be the uber-wealthy who have it.

Piles of money don’t guarantee excellent credit. Credit scoring algorithms don’t care about (or even look at) the number of zeroes on your paycheck. What matters is how you use credit products.

Here are a few mistakes even rich people make with credit, and how you can avoid those pitfalls on just about any budget.

Underusing credit

If you’re wealthy and you manage money responsibly, you can still end up with poor credit. The scenario goes something like this: You want a new car, so you crunch the numbers, figure out how much to set aside, and adjust spending accordingly. When you’ve saved the money, you pay for your new wheels in cash. Rinse and repeat, and you’ve got a strategy that may keep you out of debt.

The problem is, it doesn’t help your credit.

You can only build a great credit score by having credit and using it responsibly. You can’t get good credit by staying away from credit. Paying for big purchases up front can save you money and help you avoid the risk of missing a payment, but it gets you zero points toward your score.

An easy way to remedy this issue is to open a credit card, set up a bill to be paid automatically with the credit card, and then set up the credit card to be automatically paid from your bank account. Another option is to take a car loan and then pay it off after a month (assuming there is no prepayment penalty). Accounts closed in good standing stay on your credit report for 10 years. These are just examples of how you can maintain a cash lifestyle but still build credit. A track record of paying your debts on time is one of the biggest factors of a strong credit score.

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Letting errors slide

My sister’s name has an unusual spelling, at least for the United States: Elisabeth with an S, rather than a Z. If someone goes on auto-pilot and enters her name wrong on a loan application, the mistake could lead to a mix-up between information that belongs on her credit report and entries that should go to the stranger out there with a name only one letter off. Plenty of consumers in the US have the exact same name as someone else, making identity conflation an even bigger risk.

It’s not just misspellings that can put someone else’s data on your credit report. Social security numbers can be transposed or entered incorrectly. Mistakes happen all the time. So often, in fact, that about one out of five US consumers has credit report errors. Not all of those errors are serious enough to affect your credit score, but plenty of them are.

Checking your credit report at the three major credit bureaus (which you’re entitled to do for free once per year) is a solid way to check on your own credit habits and identify changes you’d like to make. It’s also a smart way to catch mix-ups. Even if you’re doing all the right things, an error on your report can damage your score until the mistakes are removed from your file.

Maxing out credit cards

With a high paycheck come plenty of opportunities to spend on eccentric luxuries. Charging for homes, cars, a private island, or a $150,000 octopus can easily max out your credit limit. Even if a millionaire is good for the money, racking up high credit utilization isn’t great for your credit score.

Credit score calculators (and lenders, too) look at how much revolving debt you’re carrying, and what proportion of your spending power is tied up with debt. That means reviewing what percentage of your credit limit you’re using compared to your credit limit (on each credit card and overall). The lower this percentage, the better.

The other benefit of keeping debt utilization low is that you have wiggle room for the unexpected. Swipe your card too freely, even on a high paycheck, and you might not be able to charge an unexpected car repair, or you might struggle to pay off your full balance when the next statement arrives. Next thing you know, you’re complaining that you can’t make ends meet on a paltry $174,000.

Lifestyle creep can also tank your credit score if you find yourself charging expenses you can’t pay off at the end of the month. A salary raise doesn’t help you avoid a paycheck-to-paycheck life if you add treats that eat up the extra money. A better plan? Keep your lifestyle the same when you get a raise and increase the amount you save.

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Forgetting to pay bills

Let’s say you’ve got your budget figured out to the dollar. Your friends call you for expert tips on how to find the best deals, and you’re semi-seriously considering “Thrift” as a cute middle name for your firstborn child. After all, billionaire Warren Buffett famously prefers a frugal life, choosing McDonald’s over five-star meals and living in the same house he bought in 1958. What could go wrong?

Bill payment history has as much to do with financial health as money in the bank. If your organizational skills don’t hold up to your budgeting skills, you could sail past the deadline, earning yourself a late payment penalty.

You don’t just need to have the money to pay creditors. You need to take the next step and actually send the payment along, too. Wealthy people can miss or forget a payment just as easily as anyone.

Even one missed payment could lead to a 100-point drop if your credit score was excellent before the mistake. Bills that go to collections (like that final cable bill that got sent to your old apartment building when you moved and switched providers) can wreak major havoc on your score. Even if the overdue amount is small, the ultimate cost can be much greater if lenders won’t offer you the best terms anymore.

Set up auto-payment as often as possible and keep an organized bill-paying system. If you move, tie up loose ends like change-of-address forms promptly, or pay online so you’re not waiting on a piece of mail.

How to improve your credit score

Your first step toward a stronger credit score is understanding where you are. You can (and should) get a free credit report annually from each of the major credit bureaus to learn from your past habits and take a proactive approach to keeping your credit reports accurate.

Working toward an excellent credit score is a much more accessible goal for most of us than earning our way into the top 1%. Commit to one healthy credit habit right now, whether it’s opening your first credit card account or writing out a six-month plan to pay off a card with a high balance. As your credit score improves, you may find yourself in a better position to get good rates from lenders, making it easier to reach the goals that matter most to you.

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Jessica Sillers is a writer who specializes in financial services, business, and parenting. She lives near Washington, D.C. with her family.

Haven Term is a Term Life Insurance Policy (ICC15DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Not all riders are available in all states. Our Agency license number in California is 0K71922 and in Arkansas, 100139527.

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