“Your credit score is a representation of how you’ve repaid past and current consumer debt obligations,” Foster says. “For basic consumer transactions, such as a residential mortgage or credit card, the more likely it is that a good credit score is going to help you. However, for “tailored credit” (larger, customized loans extended to high-net-worth-clients by wealth management firms), a good credit score is rarely a material positive driver. Often those loans aren’t reported to credit bureaus anyway.”
However, in both consumer and custom credit situations, a poor credit score will likely hurt you.
“It’s surprising how often you find high-net-worth individuals with low credit scores. Sometimes it’s the distractions of wealth that diverts focus from diligent bill paying. Or a principled stance on not paying a medical bill believed to be incorrect. Sometimes it can be because of identity theft or a byproduct of divorce.”
For consumer loans, a low credit score will almost always have a negative impact, regardless of a person’s wealth. At best it requires an exceptional approval. At worst, a person could be denied credit. But it also can affect custom credit. Risk managers will see a low credit score as a red flag and may require additional information or changes to the terms of the loan. An unsecured loan request under these circumstances can be particularly difficult.
Foster gives the example of someone with a nine-figure net worth and very low debt who was seeking an eight-figure secured loan for an investment. Three years prior on bad advice from an advisor the person had given the keys back to a lender on a house that was underwater. The “savings” achieved from this was insignificant compared to the person’s net worth, but unfortunately it also created a low credit score and a red flag to the lender. It almost killed the deal and caused several weeks of delay to approve.
“Regardless how large your balance sheet is, if you don’t maintain a good credit score—or work hard to repair a damaged score—you can expect difficulties when accessing credit,” Foster said. “Focus on improving your score and having detailed explanations for any negative items to minimize the impact.”
Myth
Obtaining a large unsecured line of credit (a loan without collateral) improves a person’s credit profile and attractiveness to lenders.
Reality
The existence of a large unsecured line(s) of credit can have a uniquely negative impact on your financial profile.
“I’ve seen individuals aggressively looking to establish a large unsecured line, partly for its utility, but also because they viewed it as a badge of creditworthiness. Essentially these were ‘ego lines,’” says Foster. “The problem is they didn’t fully understand the limitations they were putting on themselves.”