Purpose of having good credit when you are well-off?

Question

I notice people talk about credit scores for many things, but typically they are:

1. Helping tools for mortgages;
2. Ability to get better loans;
3. Ability to get better financing options.
4. The general reasons that apply to anyone (i.e., borrow money, get rewards, payback, etc.)

My questions are simple and mean no offense:

If you are well-off financially there's a good chance you may omit one or more of these options. For example, someone well-off can afford to simply buy a house and credit wouldn't matter specifically for this anyways. Financing vehicles may be something a person of any income or net worth could do, but if you're well-off, I don't see why this person wouldn't buy at some point even if they lease and credit can get better deals. It just seems that these tools associated with credit seem more marketed to people with lower-incomes because financing is a way of paying longer-term, which people of lower incomes may be more forced to do since they may have not enough income or overall net worth.

Also, they are probably less likely to get loans if they have a good handle on money.

By "well-off" I clearly don't mean rich (as in multi-millionaire or up) - I just mean someone who can afford a house/car/etc. without having to forcibly do so through long-term payments.

I'm not saying credit isn't used when you have high income, but these specifics associated with credit that are boasted about much are way less considered when you have higher net worth - hence, credit cards still have good use for any income bracket, but other things are not so much.

My dad, for example, bought the house I grew up in all straight - no mortgage/etc. He had to work years and years to comfortably do this, but nevertheless his credit didn't matter for this.

Answer 1

Your dad may have paid an "opportunity cost" for that outright purchase. If the money he saved had been invested elsewhere, he may have made more money. If he was that well off, then his interest rate should have been the lowest possible. My own father is a multi-millionaire (not myself) and he could afford to have paid for his house outright. He didn't though. To do so would have meant cashing in on several investments. I don't know his interest rate but let's say it was 2.5%. If he invests that million dollars into something he expects to get a 7% return on in the same period, then he would make more money by borrowing the money. Hence, he would be paying an opportunity cost.

Assuming you need to work, some jobs will also do background or credit checks. Credit cards can be used by well off people to actually make them money by offering rewards (compared to straight cash transactions). The better your credit history, the better the cards/rewards you can get. You can build that credit history better by having these loans and making timely payments.

Answer 2

Credit scores, or at least components of them, can sometimes factor into how much you pay for car insurance.

Source: Consumer Reports: How a Credit Score Increases your Premium

Answer 3

Because even if you won the lottery, without at least some credit history you will have trouble renting cars and hotel rooms.

I learned about the importance, and limitations of credit history when, in the 90's, I switched from using credit cards to doing everything with a debit card and checks purely for convenience. Eventually, my unused credit cards were not renewed. At that point in my life I had saved a lot and had high liquidity. I even bought new autos every 5 years with cash.

Then, last decade, I found it increasingly hard to rent cars and sometimes even a hotel rooms with a debit card even though I would say they could precharge whatever they thought necessary to cover any expenses I might run.

I started investigating why and found out that hotels and car rentals saw having a credit card as a proxy for low risk that you would damage the car or hotel room and not pay.

So then I researched credit cards, credit reports, and how they worked. They have nothing about any savings, investments, or bank accounts you have. I had no idea this was the case. And, since I hadn't had cards or bought anything on credit in over 10 years there were no records in my credit files. Old, closed accounts had fallen off after 10 years.

So, I opened a couple of secured credit cards with the highest security deposit allowed. They unsecured after a year or so. Then, I added several rewards cards. I use them instead of a debit card and always pay in full and they provide some cash back so I save money compared to just using a debit card. After 4 years my credit score has gone to 800+ even though I have never carried any debt and use the cards as if they were debit cards. I was very foolish to have stopped using credit cards 20 years ago but just had no idea of the importance of an established credit history. And note that establishing a great credit history does not require that you borrow money or take out loans for anything. just get credit cards and pay them in full each month.

Answer 4

A $250K earner might have $4M in retirement savings and $500K in available funds, but doesn't wish to spend all his liquidity on the house. In general, a house might cost 2-3 times one's annual income. It would take many years to get that saved up. They might want to have the house sooner.

It all goes back to choice, priorities, personal preference.

Answer 5

People just love becoming more well-off than they currently are, and one of the ways they do it is with leverage. Leverage requires credit. That desire is not exclusive to people who are not already well-off.

For a well-off person who wants to become more well-off by expanding their real estate ventures, paying cash for property is a terrible way to go about it. The same goes for other types of business or market investment. Credit benefits the well-off even more greatly than it benefits the poor or the middle-class.

Answer 6

Credit in general having no significant change between an income level or net worth is due to the economic reciprocity principle inherent in many societies. Although some areas of credit may be more admirable to those who aren't as well-off, such as car loans, the overall understanding of credit is a trust agreement between someone getting something (e.g., credit card user) and someone giving something (e.g., bank or company). Credit doesn't have to mean just money -- it can be anything of value, including tangible materials, services, etc. The fact is that a credit is a common element in most economical systems, and as such its use is not really variable between income levels/etc.

Sure, there is variance in things like credit line amounts and rewards, but the overall gist is the same for everyone -- borrowing, paying back, benefits, etc. All of these exchanges form the same understanding we all know and follow. Credit brings along with it trust -- the form represented in a score. While not everyone may depend entirely on credit, and no one should use credit as a means of getting by entirely (money), everyone can understand and reap the benefits of a system whether they make 10K a year of 10M a year. This is the general idea behind credit in the broadest sense possible.

Besides, just because one has or makes more money doesn't mean they don't prefer to get good deals. Nobody should like being taken advantage of, and if credit can help, anyone can establish trust.

Answer 7

I have never had a credit card and have been able to function perfectly well without one for 30 years. I borrowed money twice, once for a school loan that was countersigned, and once for my mortgage. In both cases my application was accepted.

You only need to have "good credit" if you want to borrow money.

Credit scores are usually only relevant for people with irregular income or a past history of delinquency. Assuming the debtor has no history of delinquency, the only thing the bank really cares about is the income level of the applicant.

In the old days it could be difficult to rent a car without a credit car and this was the only major problem for me before about 2010. Usually I would have to make a cash deposit of $400 or something like that before a rental agency would rent me a car. This is no longer a problem and I never get asked for a deposit anymore to rent cars.

Other than car rentals, I never had a problem not having a credit card.

Answer 8

there are several reasons you might want good credit even if you could afford to pay for all your expenses in cash.

1. leverage: even if you have enough cash to buy a house, you might want to invest that cash instead. assuming your investments earn more than your mortgage interest, you come out ahead. mortgage interest is generally much lower than other margin interst. credit card interest can be zero for people with good credit.
2. tax breaks: mortgage interest is tax deductible. also, investing inside retirement accounts can provide tax breaks. however retirement funds are not always available for other large purchase (e.g. house, car, yacht)
3. rental and insurance rates: having good credit can get you better rates on things like car insurance and life insurance, etc. also, rental companies of all sorts, from cars and hotels to construction equipment will give you better and more convenient rental terms if you have good credit.
4. promotional offers. there are a lot of promotional offers available in the credit space. notably, sign-up bonuses and/or cash back offers for credit cards can pay you hundreds of dollars per year if you have good credit.
5. liquidity: you may not have the funds you need on hand for various purchases (e.g. house). tax rules (regarding retirement accounts, long term capital gains, wash sales, etc.) can all limit the availability of your funds. there are also some illiquid investments. for example, you may have real estate or collectibles that are difficult to sell for a good price on short notice.
6. liability: during the recent real estate crash, many home owners chose to allow the bank to foreclose because it was cheaper than selling the house and taking a loss. especially in states that protect borrowers from liability, mortgage default can be a very profitable option. if you are considering liquidating retirement assets to buy a house, this is particularly interesting since retirement accounts have some protections from bankruptcy (although, your primary residence has other protections too).
7. employment opportunities: employers are allowed to make hiring decisions based on credit scores in some states. also, federal security clearance requires a background check that includes a credit check. it seems unlikely that a few missed payments would make the difference in getting a job, but it is potentially a factor especially in the financial sector.

having pointed out all the above reasons to have good credit, it is probably worth noting that many people with good credit choose to not borrow simply because they are more comfortable with the risks of not borrowing (e.g. inflation risk), than they are with the risks of borrowing (e.g. investment volatility).

Answer 9

Credit is very important even if you are wealthy.

One thing you may not realize is that rich people typically have comparatively little cash on hand. If they're smart, most of their assets are not liquid - they're tied up in safe, long-term investments. They use credit for their day-to-day expenses and pay it off from the dividends on their investments (which might only come in once a quarter).

There are also tax advantages to using credit. If a rich person wanted a new car, he'd be smarter leasing it for his business (immediate write-off of the lease payments on taxes) versus buying it (depreciation over several years plus property tax liability in some states). There are more elaborate tax dodges but the point is that buying a car outright is the worst option in terms of tax avoidance.

Another way the rich (mis) use credit is so that they don't risk their own money on business ventures. Let's say I have $1,000,000 in my personal bank account, and I want to buy a business that costs $1M. If I am dumb, I clean out my bank account and put all my money in the business. I get 100% of the profits, but I also bear 100% of the risk. If I'm smart, I loan 200K of my own money in the business and put the rest someplace safe, and get a loan from a bank for the other 800K. If the business succeeds, the bank gets their money back plus interest. If it fails, the business declares bankruptcy and the bank eats the 800k loss. If I structured the debt right, my personal loan to the failed business gets paid back first when the company is liquidated, and the bank gets whatever is left over (if anything). The most of my own money I can possibly lose is 200k, and probably it's closer to zero if I have a good accountant.