One of the debates raging in the personal finance world is between those who believe it is possible to live without credit, and those who think that credit is necessary–especially if you want to make major purchases (like a home). Some figure that if you could just make enough money, then credit would be completely unnecessary; you could pay cash for everything.
For now, let’s lay aside the debate over what constitutes “rich.” Plenty of leaders feel that an annual income $250,000 makes someone “rich.” Whether or not you agree with that number, it makes an interesting starting point since most people in the U.S. make significantly less than $250,000 a year. And chances are that someone who fits that definition of rich does need credit, if only to buy a home.
Everyone Needs a Credit History
Unless you are among the ranks of what we consider über rich, making millions or billions of dollars a year, chances are you will still need a mortgage loan to purchase a house. This means that you need to be approved for the loan–and that means credit.
Without a good credit score, even the rich won’t get the best interest rates. And one of the reasons that many rich people are rich is because they know how to get the best deals. It follows that many rich people interested in paying as little as possible in interest would make sure that they have good credit so that they get good rates on their loans.
But what if a rich person has a home? Is credit still necessary for the wealthy?
Why Many Rich People Use Credit Cards
You would think that rich folks wouldn’t need credit in the form of credit cards; they have large bank accounts and can just use their debit cards, right? However, there are advantages conferred upon people for their credit card use. Here are some reasons that rich people might still use credit, even though they have the cash to pay as they go:
- Security: Carrying cash can be risky, since there is no way to get it back. A credit card comes with fraud protection–something that rich people value. It reduces their liability in cases of fraudulent card use and identity theft in a way that some debit cards don’t provide.
- Rewards: If you have a good rewards program, you can get more out of it. Rich people can make most of their purchases with a credit card, rack up the reward points and then pay off the card at the end of the month. They don’t accrue interest charges, but still earn free airline tickets, merchandise and even cash back.
- Putting money to work: When you make purchases on credit cards, you are putting off paying for your merchandise. This means that as long as you pay the balance off each month, you can keep your money in an interest-bearing account longer, putting it to work for you. Rich people understand that it’s always better to earn interest than to pay it. With judicious use of credit, it is possible to put their money to work for longer, while they put off paying for purchases.
In the end, even a rich person may need a loan, and good credit is necessary. Plus, the use of credit can be advantageous in some cases. So, while it might be possible to live a completely credit-free lifestyle, many rich people choose not to in order to maximize their money.
