Many people know their exact credit score. If it is great, they wear it as a badge of honor of their financial prowess. “My credit score is 814,” they will say quite proudly.
Others who have a more colorful experience with credit, will wear it as a badge of dishonor. “My credit score is in the toilet,” they say with a glum look.
The fact is that credit scores are only a measure of how well a person can manage debt and contractual financial agreements.
Credit scores are calculated using these data points:
- Type of credit issued [Revolving debt (credit card) or Installment debt (anything with payments and a pay-off – car loan, boat loan, student loan, etc.]
- Age of the credit relationship
- Amount of credit one can obtain (total of all credit limits)
- Amount of credit one has consumed (percentage of total credit limit)
- Payment timeliness
- Requests for credit (“hard pulls” of credit)
- Outstanding judgments
Look at the list again. Does it include any relationship to how much money one might have in a savings account? Or any connection to a person’s net worth?
Here’s the fact: You could be a millionaire and have a terrible credit score.
How? By having zero credit relationships.
While a great credit score is more desirable than a terrible credit score, it is not the best indicator of financial success. Choose instead to make financial decisions about what best increases financial margin and net worth!