Put your smartphone away and close your FaceBook tab.
Spend the next ten minutes reading this all-too-important document!
You will learn how high profile celebrities manage their credit. The good, the bad, and the ugly; get advice on how to build credit from scratch, and how to protect yourself from financial disaster.
Read on and learn in two parts, where you will learn five tips each on how to build credit like a celeb. You will also get five tips on how to avoid the path to bankruptcy many celebrities take!
How Do Celebrities Build Credit?
It doesn’t matter if you are Lebron James, Miley Cyrus. A loan isn’t easy to access without a co-signer, unless you have a good job and strong FICO score. But, everyone has to start from somewhere…even celebs!
How do they do it? The same ways you can!
1. “Establish a Borrowing Profile”
The biggest mistake one can make is waiting until they need to borrow to establish a credit line. You should always be trying to improve your borrowing profile. If you’re not, the worst thing you can do is put it off.
If you don’t have any established credit, take the time to get at least one line of credit. It can be a credit card, student loan, or otherwise. Whichever type of financing you get, make sure it’s an account that will stay open for a long time. The age of all credit accounts factors into the calculation for your FICO score. Older accounts help to improve your overall average credit age, which has a significant benefit on your score.
Basically, there will be a time in life when you want to borrow more than you currently can borrow. Take the time to establish credit, for the fact that you want a quality borrowing profile. It comes in handy when you want to finance for a vehicle or home. Otherwise, you end up being a first-time borrower that’s taking out a large loan with crazy interest premiums.
2. “Invest in Secured Credit Cards”
Borrowers with bad or no credit might benefit off using secured credit cards. Approval is easy, and giving larger deposits lets you hold higher credit limits. In the United States, borrowers have access to secured credit cards that report to the credit bureaus. This means you can establish a quality FICO score without needing to qualify for unsecured credit.
Typically, the credit card company will call you up after the first year and offer to transfer you to a non-secured card. This will further build your credit and increase your credit availability. If you weren’t able to get a non-secured card before, this is the perfect way to start.
When applying for secured credit cards it’s imporatnt to verify that the card you apply for is one that reports to the credit bureau. Some make the mistake of buying pre-paid credit cards, and other “secured” credit cards. Yet, few realize a lot of these cards make no impact on your credit score. If the card won’t help your score, don’t worry.
3. “Accept All Credit Limit Increases”
A credit limit increase isn’t a bad thing, unless you have no control over how you spend. By increasing your credit limit, you get a free bump up in your FICO score. This comes from the better utilization rate you get when your new rating calculates. The utilization rate can go through drastic changes from accepting credit limit increases.
Accepting all credit limit increase offers is a way to see an automatic increase in your FICO score. You just have to avoid accepting fresh credit card offers. When your credit card company reaches out to increase your limit, agree to it and watch your score go up. You end up with a lower utilization rate, which forces your FICO rating to rise.
To explain, if you have an owing balance of $1,000 on a $2,000 limit, then got an increase to a $5,000 limit, your utilization rate would drop from 50% to 20%.
This is important. For low income borrowers, it’s especially valuable to have the chance to increase your upper limit. Your debt ceiling is the numerator in your credit rating calculation, and the denominator is the amount you owe. You can watch your FICO score go up each time you accept a card limit increase, as long as you remain financially diligent.
It’s fine to request a credit limit increase, but not more than one in a year. You should let the credit card company contact you, if you have a newer account. Most credit card companies will give a limit increase to good borrowers after the first year. Some even offer a limit increase within the first six months.
The biggest damage of frequent credit limit increases comes when you request the increase. This makes you look like a riskier borrower, while accepting a credit limit increase does much more good than bad.
4. “Build Credit with a Co-Signer”
Financing through co-signers is a great way to build your credit in the early stages. With the right type of financing, and the right co-signer, you could qualify for high limits right away. This jumps you into quality credit status in a short period of time. The difficulty, you need to know others with great credit that are willing to co-sign for you.
A celebrity’s social circle consists of many wealthy individuals. Most celebrities come from wealthy families, as well. This makes it easier for a celebrity to qualify for financing with a co-signer. Celebrities often use co-signers to get credit cards, or use income as proof for private financing options. These options make it easier for high-income individuals to build up a quality credit profile and FICO score.
The issue with co-signer financing is that most credit cards do not allow co-signers on the application. The most you can get is a co-applicant, which doesn’t allow you to factor their credit strength. It’s a good thing if it’s an option. But, there are usually alternatives that avoid tying up a co-signer’s credit capacity and trust.
5. “Keep Safe from Identity Theft”
Over a million Americans are victim to identity theft each year. This number is on the rise, with no expectations of slowing down in the soon future. As a borrower, it’s important to protect yourself from identity theft. It’s something that can crush all your credit building efforts in the blink of an eye. You don’t want to carry a debt that’s not yours, and you absolutely don’t want your credit score shot because of an identity theft.
Identity theft protection is about being careful where you put your credit card information. Celebrities often put all different types of expenses on their credit cards. Everything from gas to clothing, and even a scratch ticket at a random convenience store, it all processes from the same card.
You shouldn’t put the trust of a $100,000 card limit at risk for a $1 pack of chewing gum. It’s easy to separate your credit lines for daily expenses, just use the higher limit cards for larger expenses. These are usually trustable payments and purchases, given the higher value of the items. It’s easier to trust a recipient like a car dealership or large department store. Yet, there is a greater chance of identity theft when shopping in a less popular store, or when buying items online. Hence, the benefit of separating credit purchases by card.
Mind you, there’s no guarantee your credit card will stay safe from identity theft. Target is a big business, but had a security breach of over 40 million credit card numbers in 2013. Department stores are often victims of card skimmers, which are another risk for cardholders.
When paying online, use a third-party payment processor to serve as the middleman. You can upload funds through Google Wallet or PayPal and avoid risking your information with a bunch of merchants.
Practice Quality Credit Building “the Celeb Way”
Celebrities rely on credit cards each day, especially when buying luxurious items. This doesn’t always come down to an affordability issue. Celebrities tend to treat credit cards as an alternative to holding cash.
You might not earn as much as most celebrities in a year. That doesn’t mean you can’t be as responsible with your credit cards. Celebrities are humans, and it’s not uncommon to see a celebrity filing for bankruptcy. Yet, a well-off celebrity can maintain solid credit by following a few simple steps.
Here’s the smart approach celebs use to building credit!
1. “Credit Becomes Debit”
The single most effective way to build your credit is by employing the “credit as debit”. This requires you to use your credit card for daily transactions, or on a semi-regular basis. This builds activity on your credit account, which has a much better impact on your credit rating than a lifeless account.
The biggest benefit of the “credit as debit” approach is the ability to budget everything under a single bill. You can combine all the different expenses under one title, then make a lump sum payment to cover all your monthly costs. Further, paying before the statement closing date is a good idea. This clears the balance owing in time for the credit bureau to view your debts as clear. Yet, going past this deadline will result in a balance owing and a higher utilization ratio.
The “credit as debit” scheme works great. You also don’t need to be able to put 100% of your expenses under this repayment structure. For example, someone undergoing credit repair could set aside $500 a month to run with a “credit as debit” account. This will build the borrower’s credit profile with depth. This approach serves as the perfect way to jump start credit with a fresh borrowing profile.
2. “Credit Monitoring Services”
Celebrities are not lazy by any means, but there’s not enough time in a day to keep up with all credit changes. A celebrity might process a lot of money through credit cards. As such, it’s easy to misinterpret numbers over time. This is why many celebrities hire personal accountants. For the average Joe, credit monitoring services offer similar benefits.
A credit monitoring service can keep you from running your debts too high. It’s more effective for one other reason: with a credit monitoring program, you can catch identity theft as it happens!
Recent studies show over 1 million Americans fall victim to identity theft each year. This is an alarming number, and it’s enough to justify investing in a credit monitoring service.
3. “Payment Quality Standards”
Celebrities often get enough trust to take on high credit limits. This is both good and bad, and the same applies for normal people. If you have a significant credit limit, make sure each transaction is safe. It only takes one fraudulent use of your credit card to ruin your credit rating and to send you deep into debt.
The section on identity theft covers this topic well. It’s important to focus on your online shopping habits. After all, that’s where most low-profile cardholders become victims. The use of PayPal or Google Wallet as a buffer, keeping your credit card info safe, is definitely a good idea. Alternative payment methods like virtual currencies (ex. Bitcoin) are also safe for online payments. These don’t report to credit bureaus in any beneficial way. But, the added safety makes it beneficial under certain circumstances.
Identity theft is not the only concern. Using credit card information at a non-trusted merchant can cause unauthorized charges. Credit card companies might cover your first loss or two, but don’t expect that fall-back to be there forever. Plus, becoming more of a liability to your credit card company will eventually come back to bite you.
4. “The Self-Employed Lifestyle”
Many celebrities work under contract, which compares with the income prospects for self-employed workers. There are a few simple concepts you can take from the celeb finance world, that translate well if you are self-employed.
Most important, don’t let a few months of good times dictate your budget for years to come. If you’re a professional poker player, you can’t expect a single tournament win to improve your lifestyle. As such, you can’t use it to justify being able to afford more in credit card bills each month. There’s a big difference between your lump sum earnings and your recurring earnings. This is a large enough difference that it can drive you deep into debt. This goes to show, a proper budget comes with knowing the right lifestyle to live.
Plus, celebrities and self-employed workers are both victims of heavy taxing. It’s important to consider the amount the government garnishes from your earnings. Celebrities and self-employed workers both often receive payments without any income taxes removed. This means it’s necessary to save part of the earnings to later send to the government in an income tax payment.
It’s not always possible to know how much you will owe the government. Yet, you cannot expect to be able to wait three or four months before knowing your finances. Some purchases have to happen right away, so figuring out a rough monthly average is a good idea. It’s also worth putting in a “credit limit” within your expected earnings total, as a further safety measure.
5. “Plan for a Lifetime”
People look at credit repair in hopes of results in one to two years, but the biggest effects come into play after four to five years. Many fall off track before the optimal results are attainable. This doesn’t mean such great credit building success is no longer within reach.
Celebrities often live stable lives. This makes it easier to “plan for a lifetime” as there are no major financial worries in the soon future. You can make a similar effort, by planning out your credit building intents for the next five years. You can do this in many ways, such as by weighing the increase in borrowing availability and the improvement in credit rating.
Slow Down…You Don’t Wanna Go Bankrupt!
Now, let’s not put all celebrities into a single shell. It’s never safe to assume all celebrities are able to stay responsible on their debt. Instead, it’s fairer to assume credit issues will arise when the celebrity reaches a tough financial time. This is because most celebrities are able to build up a lot of credit access over time. Any change in the celebrities affordability that’s not priced in can send the celeb into a downward credit spiral. Sooner or later, this often results in filing for bankruptcy.
The same is true for you.
Your lack of credit affordability does not exempt you from bankruptcy troubles. Credit companies will still offer increases, which you should accept. It’s all in how you handle your credit, and whether you are financially responsible.
Learn from what the celebs do wrong, and examine your lifestyle every time you do taxes. It’s easy to let financial restraints drag you down until there’s obvious damage done. Yet, you can keep yourself from hitting new credit problems by being responsible and thought-out from day one!