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.
Now, there is some merit in the importance of your credit score. It helps you secure better borrowing terms for loans, lowers your insurance premiums and opens up opportunities to better financial deals.
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 takes 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.
But so what? What does it matter if your credit score is great but you’re living paycheck to paycheck?
You may get satisfaction when you cross that 800 mark, but you aren’t saving for a house, your retirement, or your kids college education.
Which is why I frankly think that your credit score is overrated. Sure, it matters. But it’s not nearly as important as most make it out to be.
So what should you focus on instead?
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 achieving your financial goals.
Now look, I’m not telling you to trash your credit. I’m not telling you a high credit score isn’t a good thing.
What I’m saying is this:
Increasing your net worth is far more important than increasing your credit score.
So what do you think? Do you agree that your net worth is more important than your credit score? Or do I have it backward? I’d love to hear from you. You can email me at firstname.lastname@example.org, schedule a call with me, or contact me here.