In Episode 15, I share some tangible ways that high earnings + a high credit score actually make life cheaper (with better service, to boot)…which in turn accelerates your FIRE goals.
What you’ll learn in this episode:
- Why banks, lenders, and credit card companies look for customers who don’t need them
- How you can use this to your advantage
- 5 major life expenses that get cheaper the higher your credit score / earnings are
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What’s up, finance friends? Welcome back to another episode of the podcast.
Last time, we talked about how to maximize your credit score and protect it. Today, I want to talk about the tangible benefits that that brings, how it actually makes life cheaper for you, which ultimately accelerates your FIRE goals.
Before we jump into the details though, as always, I want to invite you to join the private Hack Your Wealth Facebook group, which you can access at hackyourwealth.com/FB.
I invite you to join. It’s a way for us to connect, have a two-way dialogue. I’m literally in there every single day, multiple times a day, responding to all the posts and questions there.
And it’s a forum where folks will ask about financial independence, early retirement, tax strategies, real estate investing, side business income, online income, career transitions, and just asking for advice about all kinds of personal finance issues.
So I definitely encourage you to join. It’s a great way to meet other like-minded FIRE folks and a way for us to connect personally, so please join.
Good credit = life is cheaper
To kick off today’s episode, I want to highlight the key takeaway or lesson that I want you to walk away with if you learn nothing else from this episode. And it’s that having a high credit score actually makes life cheaper for you.
Having a high credit score obviously allows you to apply for fancy credit cards, get a mortgage, stuff like that, but the end game is that it actually just makes life cheaper all around. Earning a high income and having a high credit score makes life even cheaper still.
So I want you to think about the upside of having a high credit score as not just being about getting access to new credit, although you will. It’s about making life cheaper.
Because in financial services, the reality is that lenders, banks, credit card companies, all these financial service providers want to lend to people and do business with people who don’t actually need the money and who don’t need the credit. So those folks get the best rates, the best deals, the best access to exclusive financial products.
Now, that may beg the question, “What about borrowers and small businesses that actually do need the money? Isn’t that the point of it all?”
Because if you don’t need the money, you wouldn’t need to borrow. You wouldn’t need the credit.
It’s only if you needed to buy something, like a house or a car, or you needed to grow your small business by investing in it that you would even need credit or a loan. And isn’t that what financial service providers are there to do?
Well, the truth is that lenders and creditors don’t want customers who are looking to borrow and looking for credit.
That’s why it’s better to stock up on credit and, to some extent, debt when you don’t need it, so that when you do, you’re not scrambling to get it. You already have it.
And the key point here is work hard to build and zealously defend your high credit score when you’re not necessarily needing or looking for credit, because when you actually do need it, you want it to be ready.
Same principle as having a healthy cash balance when the stock markets are frothy, so that when there is a decline or a flash crash or something like that, you can just pounce and buy a bunch of things.
So let’s talk about some of the categories of things that actually get cheaper when you are cash rich and have good credit.
1. Credit Cards
When you have a high income and you have a good credit score, first, obviously, credit cards get cheaper. You get lower interest rates.
Not that you would know about that because if you’re listening to this podcast, I bet tooth to nails that you don’t even carry a credit card balance. You always pay it off in full every month.
But you definitely get lower interest rates.
You also will enjoy higher credit balances. You’ll get a five-figure or even a six-figure balance. You’ll get access to better loyalty reward cards, actually better premium cards, where the signup bonuses are really significant, upwards of $1000 in redeemable travel value per signup bonus.
But then also ongoing retention incentives, like juicy per spend point accruals that are multiples of what normal run-of-the-mill credit cards will give you.
You’ll also be able to access things like cards with free anniversary hotel night rewards and things like that. You’ll just get access to better cards.
The cards that you have access to will also have better perks, like free ATM withdrawals anywhere in the world, no foreign exchange fees, free global entry for travelers, priority pass lounge access, rental car, primary insurance protection, things like that. Even elite status with global hotel chains and airlines.
And they often will come with dedicated concierge service that can help you book things like reservations for restaurants and things like that.
There’s all these things that you get access to with better, more rewarding credit cards when you have a better credit score and when you have a high income. So that’s number one.
Second category is that it actually just makes vacations cheaper. You get pre-approved for super discounted vacations.
For example, later in the year, I’m taking my wife to a fancy Hawaii resort for a week for about $600 bucks all in, rental car included, when normally that would be the cost per night at the resort.
The resort is totally not making money on this, but they’re willing to take that loss on this because they want us as high earners to take a two-hour seminar as part of the discount deal to hear about their condo timeshare products.
So fine, we’ll go listen to a two-hour seminar where their sales and marketing folks will do a pitch and we’ll do a condo property tour. And then we’ll have the whole rest of the week free to do whatever.
But they only offer this to folks who demonstrate high enough income and strong credit that they would even be qualified buyers for such a timeshare property.
Whereas in my case, I just want to arbitrage vacation. I just want a low-cost vacation at a high-cost place.
A couple of years ago, as another example, I took my wife to London and Paris for two weeks. And same thing. We stayed in really fancy hotels for literally zero dollars for the entire two-week stay.
They were all five-star global premium luxury brand hotels where we redeemed loyalty points which we had rapidly accrued on the fancy credit cards that our high credit scores and high incomes had given us access to, as well as free flights for the both of us round trip, all in.
We spent about $1000 for both of us for two weeks. And that was just food, snacks, drinks, Ubers, tickets to museums, and things like that.
The most expensive parts, the round trip flights and hotels, were free. That was all free, just from redeemed points that we had accrued from our credit cards.
So vacations, I hope these couple of examples help you see, is also where high income and good credit can really save you a lot of money. Because when you pay cash for vacations, you’re paying with after tax dollars. But when you redeem points, it’s a tax-free asset class, same value but untaxed, compared to paying with cash.
3. Mortgage products
What else? High income, good credit. Third category of benefits that it gives you access to is just better mortgage products.
Obviously, you get lower interest rates on your mortgage. That is probably unsurprising.
But you also get to work with more dedicated loan officers who, frankly, provide better customer service, who have more clout to help you negotiate an even lower rate with the corporate office, who have the power to, and often will, waive your loan fees, your origination fees, your points, things like that.
They can issue you a lender’s credit, so that the cost of the loan to you is essentially free, other than the appraisal and the title recording fees which you would have to pay with anybody.
They essentially are willing to take on operational losses on the loan because they hope you’ll bring more business to them later in the form of maybe investing your assets with them, using them for core banking needs, taking out other loans, maybe a HELOC or a business loan, something like that.
In fact, these private client or private wealth management mortgage lenders will often haircut the sticker price interest rate even further if you use their checking account product for your day-to-day banking needs and you link it to your mortgage.
I did this with my mortgage and that shaved off one-eighth of a point from my mortgage, which on that big of a mortgage balance is really quite meaningful.
If you invest assets with them, so for example, if you invest $1-2 million or $1-5 million in assets, you’ll get an additional interest rate discount.
And if you invest more than their upper bound, maybe more than $2 million or more than $4 million or more than $5 million, whatever it is, you’ll get an even bigger discount on your mortgage interest rate.
This is called relationship pricing.
And so when you add all these haircuts up, the dedicated loan officer, the linked bank account, the relationship pricing, it can actually add up quite significantly, maybe upwards of three quarters or even a full point lower than the published interest rate that they publish on their brochures.
And keep in mind, well-to-do clients often take out mortgages like this, even though they don’t actually necessarily need the money.
A big reason they take out these mortgages, even though they might be able to afford the home in cash, is, yes, partly because they think they can get better return on investment by investing that money elsewhere. But also importantly, because they want to have a lot of cash on their personal balance sheet.
Having a lot of cash on your personal balance sheet alone makes you more attractive to lenders and creditors in the future. And it makes it easier to get access to better loan products, better investment products.
So ironically, cash is king in the world of credit. Just keep that in mind.
Cash is king in the world of credit.
4. Loan products like HELOCs
Fourth category where high income, good credit helps is related, and that’s special credit products like HELOCs, a home equity line of credit.
Just like with mortgages, if you’re a good credit to a lender, you’re going to get more attractive HELOC terms, lower interest rate, lower fees, more flexible terms, larger loan balance, dedicated customer service.
And all that basically enables you to open up essentially, for lack of a better word, a credit card revolving line of credit on your home equity.
And that can be very useful if, for example, there’s a decline in the stock market and you want a bunch of cash to invest in a really promising investment opportunity. Or you just want extra cash to do whatever, to be able to remodel your home or to buy a second home with that money.
Whatever it is, having a HELOC or a similar type of special credit product available to you when you need it is super useful.
5. Banking products
A fifth category where high income and good credit really help is banking products. Here, being a good credit and having a lot of cash and assets on hand means you just get better banking services.
You get access to invite-only savings and checking products that actually pay modest interest, that will have no account maintenance fees of any kind, that have dedicated concierge support, like I mentioned before. No foreign transaction fees. No ATM fees.
They can also, as I mentioned earlier, lower your mortgage or home loan rates when linked to your bank account.
And it can also mean access to even proprietary structured alternative investment products.
That’s a mouthful. What does that mean? It means structured notes that might, for example, track an underlying index like the S&P 500.
Literally, it’s the bank itself that designs and creates these structured note products. But it would be a structured note product that they proprietarily create that, for example, might track an underlying index like the S&P 500, gives you at the same time a certain amount of downside protection.
Say they might offer you no principal loss for as long as the S&P 500 doesn’t decline more than 30% while simultaneously giving you a multiplier of the upside. They might offer you 1.5x what the S&P 500 returns over a five-year period, something like this.
These are products you cannot access on the open market. You have to be a private wealth client that has a relationship with the bank based on how much in assets you have parked at the bank, how good of a credit they see you as.
But these type of proprietary alternative investment products can be really attractive if you have a sizable amount of assets and you really want to protect your nut while still getting some upside. But you want that downside protection too. These things are very common.
You might say, “Well, that sounds too good to be true. How are they able to afford this?”
Well, one reason is that they obviously will structure these things in ways that they’re not totally losing.
So in the example that I gave for instance, maybe the S&P 500 normally would pay you a dividend. This one may not pay you a dividend, but they’d give you 30% downside protection, 1.5x upside protection over five years.
Also, it’s not going to be insured by the government. So if the bank goes belly-up, then your investment will probably go with it.
So if you had such an investment product, for example, with Lehman Brothers or Bear Stearns right around the time of the financial crisis, you probably lost your money.
But if you have it invested with a really credit-worthy bank, a bank that you believe will be here for the ages, maybe a JP Morgan or a Citibank or whatever other financial institution that you believe may be too big to fail.
And I’m not promoting any of these banks by any means. I’m just saying make a judgment on which banks you believe are credit-worthy and trustworthy enough that they’re likely to be there for the long term.
So I hope these examples help you see that there is a snowball effect. The more assets you have, the higher your income, the better your credit score – the longer history you have of these things, the cheaper life gets.
The lower your costs get.
The lower your interest rates are.
The more credit you get.
The more access you have to better financial products and services.
The more access you have to dedicated customer service where the customer service is actually really good.
And that’s what it’s really all for.
So to recap, hopefully this helps you view the importance of the earn pillar of my 4×4 FIRE framework that I introduced in Episode 2 of this podcast in a little bit different light.
Remember, earn, save, invest, protect.
If those terms sound unfamiliar to you, I recommend that you go back and check out Episode 2 where we deep dive into exactly what the 4×4 FIRE framework is.
But hopefully this helps you see the importance of trying to increase your income as much as possible and your credit score as much as possible.
Namely, that all your hard work and building up a high credit score, a high income, a robust portfolio of assets, it’s about being able to get access to credit lines and loans and other types of money and perks, but really the end game is just about making life cheaper. And that lets you optimize your save bucket even further.
So do well on the earn pillar of my 4×4 FIRE framework and be responsible with credit, and you actually make life cheaper for yourself and you get better investment opportunities.
And that’s what it’s all for.
It’s not abstract.
It has real rewards that impacts your bottom line and portfolio.
Because the reality of the financial services industry is that lenders and banks and credit card companies, they want to do business with people who don’t need the money, who don’t need the credit. It is those folks who actually get the best rates and deals and terms.
Want to learn how to maximize your credit score so that lenders and banks are tripping over themselves to give you the best rates and terms? Then check out our related episode on how to increase your credit score, analyze it, and protect it. It’s packed with tips and insights to help you dramatically boost your FICO score.
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See you next time!