We hear so much commentary about our credit scores. Hacks to get a perfect credit score. Why your credit score is oh so important. Why your credit score will make you a happier person.
After a while, it’s easy to fall into the hype and start obsessing over your credit score.
But there is one glaring problem with all this focus on your credit score:
HAVING A GOOD CREDIT SCORE DOESN’T MEAN THAT YOU’RE FINANCIALLY SUCCESSFUL.
Just imagine someone who makes a good income but spends so much and takes on on so much debt that they live paycheck to paycheck. He may afford the monthly payments, and as a result, his credit score will actually go up. After doing this for years, he might have a pretty high credit score.
Why is that? Because everything I just described is factored into how credit scores are calculated. Here’s the run down:
-Payment history (35%), which looks at whether you’ve paid past credit accounts on time;
-Credit utilization (30%), which measures how much credit you are using compared to your total available credit limits;
-Length of credit history (15%), considering how long your credit accounts have been active;
-New credit (10%), which accounts for recent inquiries and new credit accounts; and
-Types of credit used (10%), which assesses the mix of credit products you have, such as credit cards, installment loans, mortgage loans, and others.
Together, these factors provide a numerical score that lenders use to assess your creditworthiness and determine the terms of credit they offer you.
So you can do a great job on all five of those factors, taking on new credit cards and new credit limits, paying off the minimum amounts, and not closing any previous accounts. But why should you get any satisfaction out of thet number if you’re living paycheck to paycheck?
And that’s the weird thing about credit score discourse. People celebrating and posting all sorts of idiotic hacks so that you can cross that 800 mark, but if you aren’t saving for a house, your retirement, or your kids college education, then what’s even the point?
And as I said before, a good credit score isn’t completely useless. There are many areas where a higher credit score can help you. It’ll help you have lower interest rates on debt, including a mortgage, it’ll help you pay lower payments on auto and homeowner insurance policies, and put you in a better spot to rent a home when the landlord reviews your credit history.
But while those items are all important, it’s not nearly as important as the Tiktokers make it out to be. In fact, it’s importance pales in comparison to the most important metric of your financial life: Your Net Worth.
FOCUS ON GROWING YOUR NET WORTH
What is your net worth? Your net worth is simply your assets minus your liabilities. In other words, what you own minus what you owe.
Let’s say you’ve got $50,000 of assets in your bank and investment accounts. And $25,000 in student loans and a $5,000 car loan balance, for a total of $30,000 in liabilities.
So take your assets ($50,000) and then subtract your liabilities ($30,000) for a total of $20,000.
That $20,000 is your net worth.
Instead of worrying about whether you reach the vaunted, perfect credit score (an 850), you should be aiming at increasing that $20,000 net worth over time.
Because having your credit score remain high simply means that you are able to make payments on the debts that you have. Which you obviously should do. But that’s a pretty low bar, and you need to do more to be financially successful.
Growing your net worth, on the other hand, is a much better aspiration. When you grow your net worth, you’re growing your wealth. You’re increasing the opportunities that you have in life (which money provides). And it means that you’re one dollar closer to retiring when you want, putting 20% down on the home that you want, or even splurging and paying for your next vacation with cash.
So look, I’m not telling you to trash your credit. I’m not telling you a high credit score isn’t a good thing. It is.
To quote one of my favorite people of all time, Jim Rohn: “Learn how to separate the majors and the minors. A lot of people don’t do well simply because they major in minor things. So don’t major in minor things.”
So what I’m saying is that in the grand scheme of your financial life, your net worth is a major thing, and your credit score is a minor thing. And you need to give each of them the amount of time that reflects that reality. Because in the end,
INCREASING YOUR NET WORTH IS FAR MORE IMPORTANT THAN INCREASING YOUR CREDIT SCORE.