Why You Shouldn’t Be So Obsessed With Your Credit Score
September 27, 2017I saw a headline recently about how to get your credit score above 800 that really had me shaking my head. My first thought was, “Who cares?” It’s true that a good credit score is essential to obtaining the best rates when borrowing to buy a home or a car, but it’s definitely not the end-all, be-all that a lot of young people seem to be obsessing over.
Once your credit score is over 750, you pretty much qualify for all the best rates anyway. Working to take it higher is really more about perfectionism or competitiveness that won’t really offer you any financial perks that you don’t already have. In fact, I’ve seen too many people actually hurt their financial situations in an effort to increase their score.
Your credit score is only a measure of one part of your financial wellness.
Great credit, bad finances
I remember working with a woman who was drowning in debt. She was scraping by to make her minimum payments and couldn’t pay her bills without using her cards, but her credit score was still pretty good because she was paying on time and hadn’t maxed out any cards. When I suggested she enter credit counseling to get it under control, she balked.
Credit counseling would be a ding to her credit score and she needed to keep that up so she could get more credit. I felt helpless. Keeping her score up was more important to her than addressing the thousands of dollars she was losing to interest each year and there was nothing I could show her that would change her mind.
Great finances, bad credit
On the flipside, I have a friend who has zero debt, a fully-funded emergency fund and is on track to retire, but he has a terrible credit score because he has avoided debt and has no real credit history.
The wrong way to compare
If you were to compare the financial wellness of these two people based on credit score alone, you’d get a completely wrong picture. It’s kind of like the thin person who looks super healthy but has high blood pressure, cholesterol issues and vitamin deficiencies. Keeping your weight down is just one component of good physical health.
Your credit score is simply a measure of your ability to pay lenders back when you’re supposed to. If you’re planning to borrow money soon, then it’s something to be worried about. But if you have no plans to buy a home, finance a car, go back to school on a loan or apply for any other type of credit, don’t worry about it so much.
What you should focus on instead
Generally speaking, the people that tend to obsess over their credit score are doing so because it’s something concrete they can measure. It’s just like getting on the scale each Monday morning to assess the weekend’s damage. But there are better ways to track your overall financial wellness that are much more likely to get you to financial independence.
Tracking your financial wellness by net worth
I used to focus on my total debt as a measurement of my financial wellbeing, but that can be a little depressing. It also wasn’t considering the fact that I was increasing savings in other ways so I started tracking my net worth instead, which has been incredibly motivating.
How to find your net worth
Your net worth is all your assets (savings, retirement accounts, home, car, etc.) minus all your liabilities (credit cards, student loans, mortgage, car loan, etc.). If you’re just getting started in life, chances are you have a negative net worth, but that’s ok. As long as it’s growing each month, you’re good.
High income does not always mean high net worth
Remember when Kanye West asked Mark Zuckerberg for a loan and we all pointed and laughed at the extravagant lifestyle he lives? He may have been asset rich, but he was also liability rich. He had a negative net worth. Your net worth is the ultimate measure of your financial wellness and your goal should be to increase that number, month over month.
If you can get your net worth up while also paying your bills on time, chances are you will have a decent credit score by default, although I once unfollowed an NFL player on Twitter for tweeting about paying his cable bill late “just for fun.”
Having a high income and a lot of money in the bank doesn’t a good credit score make (in fact, neither of those factors affect your score at all), but concentrating on keeping more of the income you make and paying back more of what you owe is bound to help you achieve financial freedom. Isn’t that ultimately what we’re all after anyway?
This post was originally published on Forbes, July 2nd.