With recent Powerball and MegaMillion payouts reaching some pretty massive amounts, I thought it would be interesting to dive into how winning the lottery could potentially affect your credit score.
Let’s be honest, most of us daydream about what we would do if we were rich. We imagine doing stuff like quitting our jobs, buying a boat, and spending the rest of our lives sailing around the world. Winning the lottery could surely solve a lot of problems, but can it fix a bad credit score?
Does Wealth Have Any Effect on Credit Score?
Your credit score is a calculation that helps determine a person’s creditworthiness, rather than a wealth indicator. In fact, credit scores are based on loan and payment history and don’t take personal assets into consideration at all.
Therefore, there is no direct correlation between credit scores and wealth. High net worth individuals don’t always necessarily have high credit scores.
Can Winning the Lottery Help Your Credit Score?
According to LottoStragies.com, the average Powerball winner wins around $145M. If used correctly, this is more than enough to significantly affect your credit score, even in the short term.
However, while it’s true that having a high net worth doesn’t directly impact your credit score, it does have an effect on your ability to get approved for a loan. When deciding on whether to extend a loan to somebody, lenders will not only look at your credit score, but also make a determination based on your ability to make the payments. This is where wealth and income come into play.
Using Wealth to Improve Your Credit Score
When a person has bad credit, it’s more than likely because they were unable to make their loan payments. This results in late payments, collections, and charge offs ending up on their credit report.
Pay Off All Debts
If often takes money in order to get these negative items removed. Therefore, by winning the lottery it puts a person in the position to pay off old debts. This will result in a significant credit score boost.
Decrease Your Credit Utilization
Credit scores also take into account credit utilization. Credit utilization basically means balance-to-credit limit ratio. The lower the utilization, the higher the credit score. Therefore, a sudden increase in cash allows a person to pay off credit cards and decrease their credit utilization, which will, in turn, raise their credit score.
It’s Easier to Get a Loan When You’re Wealthy
Lastly, as we mentioned before, lenders are more likely to lend to people who have a lot of cash. By getting approved for new loans, and having the ability to make on-time payments, a person starts to build new positive credit history.
What to Do If You Win the Lottery
So what should you do if you win the lottery? Well, there are a lot of opinions about that. I tend to take advice from people who have managed (and grown) their wealth consistently over time.
Here is what billionaire Mark Cuban recommends you do if you win the lottery.
Pay Your Taxes
- First of all, hire a tax attorney and get all your taxes out of the way so you don’t ever have to worry about it.
No Risky Investments
- Winning the lottery doesn’t make you a smart investor. Rather than invest the money, park it in the bank and live comfortably for the rest of your life.
Don’t Loan Friends & Relatives Money
- Friends and relatives will more than likely start coming out of the woodworks and asking you for money. Just Say No. A true friend wouldn’t ask anyway.
Money Doesn’t Buy Happiness
- Money makes life more convenient, it doesn’t create happiness.
You Can’t Buy a Better Credit Score
Being wealthy does not automatically improve your credit score, but it can make credit repair much easier. So if you’re lucky enough to win the lottery, you can easily improve your credit score by paying off old debts, building new positive credit history, and making on-time payments.