There’s no doubt that having a high credit score is important. A high credit score is often seen as the holy grail of personal finance. After all, a good credit score can open doors to better interest rates, higher limits, and more favorable terms. However, it’s important to remember that a credit score is just one factor in determining financial health.
While a high credit score may indicate responsible borrowing habits, it doesn’t necessarily mean that a person is good with money. A person can easily struggle with the consequences of bad credit because of an unexpected emergency. Will you consider such a person to be bad with money? So while a high credit score is certainly desirable, it’s not the be-all and end-all of personal finance. And you’ll be well-advised to give yourself some grace if you’re not in the 850 club.
In this blog post, we’ll take a look at the relationship between credit scores and overall financial wellbeing. We’ll also explore some of the factors that can influence your credit score and discuss ways to improve your credit rating.
Your credit score is not a measure of your financial health
A credit score (whether high or low) is a measure of your ability to take on debt. Financial health, on the other hand, takes a more holistic view of your financial situation. It’s not static and can change based on your assets, liquidity and the price of goods and services. Although financial health includes your credit and debt, it also takes into account:
- Savings
- Income
- Investments
When calculating your credit score, these three factors are not taken into account. For example, you might have bad credit and still be financially healthy.
Your net worth and debt-to-income ratio are more important
Most people know that their credit score is important. But what many don’t realize is that their net worth and debt-to-income ratio are actually more important factors in determining your overall financial health.
Your net worth is the value of your assets less your liabilities. This number gives you a clear picture of your financial situation and how much debt you’re carrying. A high net worth means you’re on solid financial footing, while a low net worth indicates that you may be in trouble.
Your debt-to-income ratio, on the other hand, shows how much of your income is going towards debt payments. A high ratio means you’re struggling to keep up with your bills or perhaps already struggling with the side effects of bad credit, while a low ratio indicates that you’re on solid ground.
Your credit score matters in specific situations
This doesn’t mean that your credit score is not important or can be ignored. There are specific situations where your credit score will be very important. These circumstances are:
- Getting a new credit card or loan
- Leasing an apartment
- Using utility or service providers such as home internet
- Purchasing insurance
- Applying for jobs (employees don’t see your score)
If your goal is to improve your credit score, here’s how
There are a few things you can do to improve your credit score and avoid bad credit.
- Always pay your bills on time
- Make a budget and stick to it
- Don’t open new lines of credit unless you really need to
- Use a credit monitoring service to help you track any changes to your credit score
If you’re not sure what your credit score is, you can check your credit report, which can be bought directly from credit reporting agencies. These are just a few things you can do to improve your credit score.
Final thoughts
The weight of financial stress can have a serious impact on your overall wellbeing, so it’s important to take a holistic approach to managing your money. A high credit score is definitely something to be proud of. But focusing on good financial health (and your own wellbeing in the process) is more important than achieving the highest credit score possible.
Knowing the difference between bad credit, your credit score and financial health is important. This may even encourage you to build up your credit score so you can have both – financial health and a high credit score. Check out our infographic for more information on the effects of financial stress and how you can manage it.
