Is a credit score the best indicator of financial wellbeing?

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A credit score is part of the equation to determine your financial wellbeing. A credit score is a three digit numerical representation of the inherent risk you pose to a creditor. It helps creditors determine the likelihood you’ll file for bankruptcy. The lower the score the greater the risk. A creditor uses a credit score to make sense of all the information that’s being shared with the credit bureau. The most popular credit score is the FICO credit score used by 90% of lenders.

There is always lots of buzz associated with credit scores. The truth of the matter is that credit scores are important but doesn’t provide a complete picture of someone’s financial wellbeing. Credit scores are dependent on your relationship with credit. It has nothing to do with your income, assets or investments. In fact, you can have a healthy savings account, own your home and drive a loan-free car and have a lower credit score than someone who has a mortgage, a car loan and other types of debt.

If having credit or debt is a true measure of wealth, than there would be millions more people who can call themselves wealthy.

A good credit score means someone is more likely to extend credit or provide subscription services because the likelihood you’ll pay is much higher than someone with a lower credit score. If you’re concerned about how much credit you can obtain or use than surely a credit score may be something you obsess over.

Although, a credit score is helpful you should focus much of your attention on choosing a debt-free lifestyle, have less dependence on credit and build assets through investments. You’ll find when you focus on living within your means, growing assets and earning money with money, you’ll have less dependence on creditors and have a better sense of financial wellbeing.

 

Asked in Elizabeth, NJ on February 26th, 2015 in Wealth.
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