Credit Score vs. Net Worth – Which is Better?

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Which is better, a good credit score or a high net worth? Here’s why it’s good to know both.

An 800 credit score sounds great, but if your net worth is a negative number, you only look like you’re doing ok financially, but you’re not. 🤭

When you owe more than you actually have, every dollar in your pocket is NOT yours. 💸

Money that you spend when using a credit card is a loan. That’s why, when you don’t pay it off in full by the end of the grace period (due date), in most cases, you have to pay interest on it. That’s how the banks get paid so they’re counting on this to slip your mind ever so slightly. 

Your credit score and your net worth determine how your lenders treat you and how much they will charge to offer you help.

What is a credit score?

Your credit score is a number generally between 300 and 850. Lenders use it to determine how likely you are to pay them back if they lend you money.

It determines how high or low your interest rates can be. Sometimes it can also affect applying for a job, taking out new loans, or even renting an apartment. Some businesses use your credit score to determine if they can trust you. Others may inadvertently punish you for not having good credit by charging you higher interest rates or passing over you for someone with a higher score.

The most common score is the generic FICO Score. Very rarely does the score go above 850. The FICO Auto and Bankscore 9 go up to 900. I recently saw that Citibank reported a score above 850. I was quite confused by that but didn’t rush to call and have them change it. LOL!

There are several models of FICO Scores that deal with specific lending situations. You can get your score at select banks and financial institutions that offer your FICO Score for free. Checking your score will give you a sense of where you stand financially.

To get the most accurate score, it’s best to get them from one or all of the 3 credit reporting agencies, Experian, TransUnion, and Equifax. You can get your credit report for free every 12 months from AnnualCreditReport.com. No sign-up is needed and no credit card is required. I get one from there every year just to stay on top of my credit profile. Checking your credit doesn’t affect your score.

Once you get your credit score, you’ll have an idea of how it’s being used to represent your financial worthiness.

How to calculate net worth

Your Net worth is your assets minus your liabilities and measures your financial wellness or wealth. It shows you approximately how much money you would have if you were forced to sell all of your assets and pay off your liabilities (debt). It’s what you will have left to call your own.

Assets – Liabilities = Net Worth

Start by adding up all of your assets. This includes high-value art, jewelry, and collectibles, the appraised value of your home and vehicle, the balances in your savings, checking, straight investments, and retirement accounts. From that total, subtract all the balances that you owe. Including what you still owe on your car, home, or real estate property, credit card balances, student, and personal loan balances. You can also use the net worth calculator on my resources page. Do not include rent.

Mint.com will also provide your net worth. It’s a free service that provides spend-tracking and pretty much your full financial picture. They also have tools to help you achieve your financial goals. Just be aware that there are ads and promotional products on the site. But you can ignore them and just use the tools provided for free by Mint. I use it every day and there has never been a charge for any of the services.

Check your net worth periodically. Just because you have a good credit score doesn’t mean your net worth is good too. You don’t want it to be a negative number and not be aware of that. You want to know so you can work towards building it up.

The following example shows how it’s possible to have both a high credit score and a low net worth at the same time.

The Broke Millionaire

If you have $1M in the bank but your net worth is a negative number, you’re not wealthy. That’s how we get millionaires who are actually broke. 🤯

In that case, you and your million dollars are almost as broke as a person with only $500 in the bank. If that person doesn’t have any debt, their net worth is higher than yours. Even if they have no other assets. Especially if you owe $2M.

But despite a higher net worth, that $500 isn’t going to give them the same leverage. Because if you were able to amass $1M, there’s a good chance you’ll have the tools and knowledge to build it again. (Unless you have it because of an inheritance or the lottery.) But that’s why knowledge and action can help anyone build wealth regardless of where they started financially.

Although the person with a $500 net worth is in the green, that’s not going to make them wealthy unless they use it to purchase an income-producing asset like:

• 👩🏽‍🎓 A business course that will help generate income
• 🛠 Tools or a piece of equipment for creating an income-producing product

When you hear that a Millionaire has filed for bankruptcy, it’s because their net worth did not reflect a millionaire status. They had a lot of assets, but they had far more debt. That drives home the importance of knowing your net worth.

Credit Score or Net Worth – Which is Better?

It’s good to pay attention to both your credit score and your net worth.

You could be very on top of your credit card payments–always paying on time and never using more than 30% of your available credit. But if you have high credit limits over several cards, that can be good and bad. Good because having a high credit limit can help keep your usage low. But bad if you’re not paying your balances in full every month.

If you’re only paying the minimum on a high student loan balance, any savings you have will take a major hit. Outstanding debt will reduce your net worth by that amount. And even worse, any interest you’re earning on your savings is being eaten up by the interest you’re paying to your lenders on credit card debt and loans.

Good and bad are relative

Whether a credit score is good or bad is relative and depends more on what you’re using credit for and how you’re using it. But having a high net worth just is what it is.

When you owe someone, that amount gets subtracted from the amount you have. Your net worth tells you more or less the amount of money you have that is actually yours.

In the end, it’s still up to you to determine which is more important to you. For me personally, a high credit score is only good if you need to borrow money. But it’s obvious from Experian’s 2019 study, that says FICO scores have never been higher, despite this, Americans are up by $2.3 trillion in consumer debt since the 2009 recession, So, what that tells me is that people in debt can still borrow money. And I know first-hand that some can still borrow even with bad credit. On the flip-side, having a high net worth is always good.

Do your credit score and net worth define you?

Your credit score and net worth don’t make you a better person or any less of a good person. They are just tools to keep you on track with your financial picture. 

So, do things with your money that will increase your net worth. And that won’t happen if you owe every dime you have to someone you don’t even know or like.

Knowing, understanding, and working towards improving your financial picture can mean the difference between living your dream life or just existing to pay bills.

If you’re not working towards building wealth, you’re either financially stagnant, working toward building someone else’s wealth, or working towards building debt.

Be fully present and completely intentional with how you treat your money or it will leave you for someone who has more.

Commit to checking your Credit Score and Net-Worth today. 

If you get stuck, don’t be afraid to reach out for help.