Do your high-net-worth (HNW) clients have credit issues? You might be surprised to learn that high-profile individuals, such as entertainers and professional athletes, sometimes have difficulty obtaining loans or credit cards because they lack sufficient credit history. And those who already have credit need to be aware of other issues, such as protecting themselves from identity theft.
Credit has become an incredibly important aspect of a financial profile and can make the difference between being able to secure the best available loan interest rates and not getting approval for a loan. If your client has a low credit score or his credit score has been compromised as a result of identity theft or errors, he could face challenges.
Children from wealthy families may have trouble building credit. While they could have significant net worth from inheritance, gifts or trusts, they may not have earned income. Many lenders won’t grant loans (for mortgages, cars, etc.) or credit cards in these situations. There may be similar challenges for new U.S. residents who have sizeable assets but no U.S. credit history. Likewise, recent divorcees or widowed individuals may lack credit if their spouse was the primary account holder on the couple’s loans, bank accounts and credit card accounts. And athletes and other celebrities who’ve experienced a rapid increase in net worth also may face credit issues. Fortunately, there are ways to properly build a credit profile for credit-challenged HNW individuals that can eventually enable them to acquire luxury items and black cards while achieving lower interest rates. Possible solutions include secured credit cards, co-signing arrangements and piggy-backing on a corporate account, as appropriate.
Another consideration, borrowing within a business structure, like a limited liability company, may be able to help insulate an individual from personal liability. Building business credit can take time, dedication and precision, but there are specific techniques that can be used to help establish credit for these types of entities.
Identity Theft Protection and Recovery
Statistics show that HNW or high-profile individuals are more often victims of identity theft. Having more exposure to the public and more people they work with, in addition to a higher number of financial accounts, can make it more challenging for them to safeguard their personal information.
“With major data breaches being reported almost every month, now is the time to implement a tool to stop thieves before they can start,” said Anthony Davenport, president and CEO of Regal Financial, which offers a credit block service.
Credit block services can help prevent anyone from opening a new line of credit or even obtaining a credit report in a person’s name, unless the block is lifted first. This paid service is one way to help safeguard your clients’ personal information and prevent unauthorized access to their credit reports.
There are also many free, online credit-monitoring services available that can help your clients keep track of their ever-changing credit history and identify suspicious activity. While these tools can be helpful, keep in mind that these services may only inform them after fraudulent activity has already occurred. That’s why a real time service is sometimes a better alternative.
The recent Internal Revenue Service data breach was a reminder that cyber risks are all around. It seems that news reports of major organizations, including Target, Home Depot and JPMorgan Chase, being hacked have become more frequent in recent years. Some of these data breaches have resulted in millions of customers’ credit card and other personal information being compromised.
New IRS Policy
Following the IRS breach, the IRS changed its identity theft policy, agreeing to provide ID theft victims with copies of the fraudulent returns filed with their information. Identity theft was actually one of the most common schemes listed on the IRS’ 2015 “Dirty Dozen” tax scams list. Earlier this year, the IRS published a suggested list of steps to take if someone files a fraudulent tax return using your client’s Social Security number. The agency recommends that victims of identity theft tax fraud, take the following steps as soon as possible:
- Submit a Form 14039, Identity Theft Affidavit, to the IRS;
- Notify your financial institutions;
- Contact the fraud department of the three major credit bureaus;
- Report fraudulent activity to your local police;
- File a complaint with the Federal Trade Commission; and
- Contact the Social Security Administration.
One in four consumers have at least one error on their credit report that could affect their FICO score, according to a 2013 Federal Trade Commission study of the U.S. credit reporting industry. Your clients can check their credit report for free once a year from all three credit bureaus (Experian, Equifax and Transunion) at annualcreditreport.com.
Finding errors is often easier than getting them corrected. If your clients notice an error, they should file a dispute with the credit agency to get the problem fixed.
There are also appropriate ways to remove unfavorable information from a credit report, including late payments, collections, public records, bankruptcies, short sales, foreclosures and loan modifications. In some cases, this type of information can simply be the result of someone overlooking a bill or missing a payment. Or there can be negative credit implications resulting from a divorce. Removing this type of information could greatly improve your clients’ credit profile.
Navigating through the consumer credit industry can be complicated for clients and their service providers alike. With proper guidance and the help of experienced professionals, getting through that process can be much easier.
Todd Kesterson is a director of Kaufman Rossin’s family office services group in the firm’s Miami office.