Your Credit Score is of the Utmost Importance (and it's really not)

Many folks are downright obsessed with their credit scores. If you google “improve my credit score,” you’ll get 245 million results! Unless you’re in the process of qualifying for a mortgage or recovering from bankruptcy, you really shouldn’t be hyper-focused on it. Of course, sometimes this is easier said than done, since you might be able to see your score every time you log in to see your bank account, credit card, or personal finance app.  

Some time ago, I invited a credit expert to teach my clients a Credit 101 webinar.  How credit scores are calculated is something we should understand. This credit expert knew all the tricks for achieving a stellar score. By the time the webinar ended, all of our heads were spinning. She achieved an amazing credit score by having over a dozen credit credits with an elaborate spreadsheet calculating how much money to charge on each every month and multiple payments of varying amounts timed just right. Honestly, this approach is as unhealthy as the “ignore your score” camp, and here’s why.

Your Credit Score is of the Utmost Importance (and it's really not)

Your credit score only measures your “success” with debt. Your credit score takes into account the following: payment history, amounts owed, length of credit history, new credit, and mix of credit. If you “play nice” with your debt, make payments on time, and have enough debt (but not too much!), you’re rewarded with a good score. The purpose of your credit score is to let banks know if you’re a good little borrower!

Your credit score is NOT the best measure of your financial success. Ultimately, your net worth is the key money metric you want to focus on. Your net worth is what you own (assets) minus what you owe (debts). Two people could have identical credit scores, but very different net worth numbers. Your credit score doesn’t take into consideration your income, bank account balances, investments, home equity, or business ownership. You could win the lottery tomorrow, increasing your bank balance by $20 million dollar, and your credit score would not go up by one puny point! If my clients are going to be obsessed with improving only one financial number, I’d prefer it be net worth.

Your credit score is only one small piece of your financial health. You wouldn’t define your physical health solely by your blood pressure numbers! In the same way, when we approach our financial health, we need to look at ALL the numbers that matter: net worth, income, cash flow, savings, investments, and yes, your credit score. The bottom line is that we should be aware of our credit scores without being obsessed with them!

Searching for a well-balanced approach to improving your personal finances? Take a look at my Financial Dignity® on Demand course, and see if it’s for you!

P.S. Did you miss part one last week? Read it here.