When you meet with your wealthy clients to perform a review, you probably don't go over their credit report very often. Maybe you never do. If so, you're not alone. Very few advisers review clients' credit reports and I can understand why.
Many of us think the only people who need to be concerned about their credit history are those with credit problems or those who have become victims of identity theft. While these two groups do need to clean up their credit files, even wealthy clients have a lot to gain by looking over their credit reports annually. And you benefit by helping them do it. Here are four reasons why:
1. Mistakes
There are different opinions as to how many mistakes credit bureaus and vendors make on credit reports. According to the FTC's most recent report, 1 in 5 credit reports contain material errors. The industry reports much lower incidence of mistakes.
(Client insights: Contrary to conventional wisdom, millennials do want advisers)
Regardless, credit bureaus collect billions of data points from millions of vendors every year, and it's very possible that your client's credit report is flawed. That fact is beyond dispute. And if there are errors in your clients' files, they may be unfairly penalized even though they may be quite wealthy.
Keep in mind that just about every company reviews credit reports before deciding whether or not to do business with people. Potential employers, business partners and even insurance companies give your clients' credit files the once-over before deciding to make an offer or do a deal.
Sometimes all it takes are a few negative items made in error to knock your client out of the running. Keep in mind that most businesses rely on credit scores to decipher credit reports. They do this by setting up tranches. So if your client's report contains a few minor mistakes, that might subtract just enough points to drop them down a level. And that decrease could result in your client's paying higher prices for credit or life insurance – or not being offered a job or an opportunity to participate in a business venture.
Mistakes aren't the only path to artificially low credit scores. If your client has too many inquiries or a maxed-out card or even a number of small loans they could pay off, these all cost credit points. If you bring these items to your client's attention, they may be able to see a significant rise in their credit score with very little effort.
2. Future Opportunities
Well-heeled clients may have all the credit they need right now. But if their credit score is lower than it ought to be, they might end up paying for it in the future. Just when they want to refinance, buy more insurance, apply for a job or buy a business, they may discover that their credit has just enough false dings to make these things more difficult.
Of course if they discover this when they want to do the transaction, it may cause just enough of a delay to scuttle the deal entirely. It takes time to
improve credit scores. Why not start now before there is an emergency?
3. Awareness
Reviewing credit scores is a great way to help your clients see the real impact their spending has on their financial life. Many rich people don't have a spending problem — but some do. Going over your clients' credit reports together gives you another opportunity to bring this to their attention.
4. Differentiator
Even if your clients' credit reports are pristine, you gain amazing credibility by reviewing their information with them. You demonstrate out-of-the-box thinking and true concern for their complete financial well-being. Let's see a robo-adviser do this.
How To Help Your Clients Have the Highest Possible Credit Score
If you want to really help your clients, you first need to understand a little bit about how the credit industry works and of course how to read a credit report. Start off by going through your own report and making sure you understand what you are looking at.
If you uncover mistakes, it's not that difficult to repair the errors, and in most cases clients can take care of it themselves. There are a few reputable firms that can be hired to take care of stickier items, but the industry is fraught with untrustworthy outfits so be careful about referring clients out.
Keep in mind that if you do spot negative items on a credit report, they must be removed if they are either inaccurate, unverifiable or incomplete. That gives you a fairly big target to shoot for, and this makes it easier for people to remove derogatory items. At the same time, make sure your clients maximize their credit score by getting rid of small loans they no longer need, keeping their credit utilization moderate and paying their bills on time.
Your clients deserve the highest credit ranking possible. Many times they don't achieve that status through no fault of their own or as a result of not paying attention. Fortunately, these problems are easy to remedy. And as an adviser, you're in a great position to help your clients do just that.
Neal Frankle is a Certified Financial Planner in Los Angeles, and is the chief editor of WealthPilgrim.com, CreditPilgrim.com and MCMHA.org.
