The high income earners guide to improving your credit score
Improving your credit score is vital as a high earner
As someone who used to NEVER have enough money, I have always been obsessed with my credit score. I used to have to use it to survive. When I was poor(er), I would often have to use payday loans and other short term credit to make it through the inevitable financial emergencies in life. You won’t hear many finance bloggers talk about using short term credit because it’s probably the worst possible thing you could do to yourself financially, but it’s a scourge that millions of people deal with and I don’t have any shame in admitting I used to as well.
As my income has increased over time, I’ve moved beyond my paycheck to paycheck past, built up an emergency fund, and have started saving and investing for the future. But that doesn’t mean that my credit score is any less important to me. In fact, as a high earner, my credit score is even more important to me now than it ever has been.
Why your credit score matters more as you earn more
As you make more money, you tend to borrow more. The most obvious and common example of this is housing. Once you have a decent income and you’ve saved a little bit of a nest egg, the natural inclination is to purchase a home so you can build wealth through appreciation and principle pay down on the loan.
The more you earn, the larger and more expensive of a home you are likely to purchase (although I would advise trying to keep things within reason to avoid lifestyle inflation). The more expensive the home, you more you borrow, and the more the interest rate matters. What determines the interest rate?
You guessed it, your credit score. Among other factors, of course.
Housing is just one example of the many ways that high income earners end up borrowing more money. There’s also margin facilities on investment accounts, small business loans (which are personally guaranteed), personal lines of credit, and graduate student loans. ALL of these things will probably need to be refinanced at one point or another, as well.
The point? Even responsible high income earners with an aversion to debt are still beholden to their credit score. So what can you do as a high income earner to improve your credit score?
Ways to improve your credit score as a high income earner
It isn’t hard to improve your credit score as a high income earner, but you do have to be comfortable with the idea of increasing your credit lines and generally GETTING more credit. Many fiscally responsible people shy away from increasing the number and size of their credit lines, because they don’t want to have any debt. This is a good impulse, but I believe you can be very responsible, avoid unnecessary debt, and improve your credit score all at the same time.
We can accomplish this by manipulating the most important components of your credit score (besides paying your debts on time): utilization rate, credit age, and total accounts.
The quick fix: increase the amount of your existing credit lines
The easiest way to instantly improve your credit score is by increasing the amount of credit you have available to yourself, which has the effect of immediately decreasing your utilization. For instance, if you have a $1000 balance on a credit card with a $5000 limit and you increase your limit to $10,000, you immediately halve your utilization rate and likely improve your credit score by a small amount.
A more meaningful long-term solution: add 2-3 new credit cards to build credit history
One of the first things that I did when I had enough income was apply for 3 additional credit cards. I know, you are probably thinking that wasn’t the best idea, but I didn’t intend to use them. I spent the minimum required to get the sign up bonuses, then put them on a shelf. My goal was to build history, bring my average credit age up, and insulate myself from the effects of new accounts in the future (every new account brings down the average credit age since new accounts start at 0 months). Of course, opening 3 new lines had the effect of temporarily bringing my average credit age way down. Here’s how the math worked out.
Originally, I had one credit card that was open for 2 years, along with a car loan that was 1 year old at the time. My average credit age at this time was 1.5 years. When I opened my 3 new credit cards, that plummeted to 6 months.
But, over time, those accounts have aged and have added significant positive history to my credit score. What’s more, now that I have 4 credit cards, the effect of any new line on my credit history is relatively small. My average credit age is around 5 years, and an additional line has almost no effect on that number.
Open diverse accounts
I am not advocating that you start applying for every type of credit you can get your hands on, but if you NEED to or there is a good opportunity to take advantage of it, the best way to improve your credit score as a high earner is with new accounts. My credit score went up 50 points after I bought my house. The more credit you have, the more credit worthy you are!
Now that you have your credit score under control, it’s time to invest
If, like me, you are looking to optimize your investments, manage your saving, and create the best strategy for the future of your money, then the first step is getting a good picture of where you stand with Personal Capital. Its free tools can help you to get a comprehensive view of all your investments, real estate, and other accounts, along with free investment advice and planning.