Investors face unique challenges when it comes to credit scores. They tend to move money around in the pursuit of better returns. Because they base their financial decisions more on the state of investment markets than consumer markets, their financial moves differ from typical consumers. Credit scores, unfortunately for investors, are modeled after consumer behavior, putting investors at a scoring disadvantage.
Know Your Credit Score
Investors’ credit scores affect their investments in three ways, as explained by NASDAQ.com. First, higher scores leave them with less investment capital. Like most people, investors have mortgages, car payments, credit card accounts, insurance policies, and other financial necessities. The cost of these items is partially determined by credit scores. When they cost more, investors have less to invest.
High-Interest Rates
Second, high-interest rates on debt are anathema to any portfolio. If forced to pay double-digit interest rates, investors are often better off paying the debt before investing. To increase net worth, invested funds must earn a return which both exceeds the interest rate on debts and capital-gains taxes. This is a high bar. If the investments lose money, the investor falls behind by both the interest rate on debt and the capital losses.
Better The Score, Better The Opportunity
Third, a higher credit score opens more investment opportunity. Though credit scores make no difference in the costs of purchasing stocks, bonds, and other types of investments, credit scores affect investors’ ability to invest in real estate. Loans, whether for a primary residence, rental property, fix-and-flip properties, or commercial properties, are contingent on credit scores. Investors lacking good credit may lose a real estate opportunity to another investor because their financing falls through. If approved, higher financing costs cut into profits and may even trigger losses.
Credit score advice for investors
Sean Seshadri, an entrepreneur and trading expert, teaches options, futures, and institutional trading at the TIE Institute. He counsels students to avoid trading with money they cannot afford to lose completely. Success in trading requires a disciplined approach and strategy. If traders use the money they need to pay bills or high-interest debts; their decisions are naturally affected by their financial concerns, which often leads to mistakes. Traders break discipline and make decisions because of their financial concerns rather than the market.
How Much to Invest
In determining how much to invest, investors must consider their obligations and debts. Money needed for high-interest debt repayment should never be used for trading. Because interest on debt eats into the real net-worth gains for any investor, investors should always work on improving their credit scores and maintaining strong credit scores.
NASDAQ.com notes five methods to improve credit scores. Investors should implement these methods with the same discipline they implement trading strategies, with the goal of achieving a credit score over 800. First on the list is paying bills on time. Nothing hurts more than late payments, and they affect your credit score for years afterward.
Don’t Carry A Balance
Utilize your credit cards, but never carry a balance. Optimal scores result from using less than 10 percent of your total revolving credit card limit each month and paying the balance off in full. For example, if your total revolving limit is $10,000, spend under $1,000 on your cards each month and pay off the balances in full before the due date.
The credit score formula rewards a predominance of older accounts, with the maximum benefit given to account open for at least ten years. Also, the formula accounts for the average age of all accounts. Keeping older accounts and opening a few new ones provides the best results.
Credit Diversity
10 percent of the credit score is based on credit diversity. Having a credit card and another type of loans, such as a mortgage, car loan, or student loan, provides great results for this portion of your score. Having active credit cards and a mortgage loan, car loan, and student loan provides the ideal mix. Avoid shopping for new credit until necessary. Credit inquiries bring down your score for six months afterward.
Investors benefit tremendously from solid credit scores. By limiting the expenses of credit, investors have more to invest and can more easily remain financially flexible, which allows them to take advantage of market opportunities. For strategies on how to use the money saved with a great credit score, visit the Dr. Sean Seshadri investment blog.