Higher net worth is a good thing. But will it help your credit?
- Higher net worth could lead to greater financial stability.
- Net worth does not directly affect the calculation of your credit score.
Your net worth is something you might not think about all the time. But you probably know that the higher it is, the more financial stability you have.
Your net worth is measured as the total value of your assets minus your liabilities. Imagine you have $ 20,000 in savings and own a house worth $ 350,000. Suppose also you have a personal loan of $ 5,000 to repay and you owe $ 200,000 on your mortgage. At this point, you envision a net worth of $ 165,000.
Seeing your net worth increase is something you can be proud of, but will higher net worth help your credit score?
How credit scores are calculated
There are five different factors that go into determining credit scores:
- Payment history, which shows how well you are processing your invoices on time
- Credit Usage, which shows how much of your total revolving line of credit you are using at one time
- Duration of credit history, which shows how long you have had accounts open
- Credit composition, which measures the different types of credit and debt accounts you have
- New credit accounts, which show the number of new loans or credit cards you have recently applied for
As you can see, net worth is not on this list. And as such, having higher net worth will not automatically increase your credit score. While having money in savings and owning a home can improve your financial situation, it won’t turn a 650 credit score into 750.
In fact, it is possible to have high net worth but poorly manage debt and bills. In theory, someone could have an impressive net worth and a bad credit score.
How Higher Net Worth Could Improve Your Credit Score
While net worth is not a factor that goes into calculating credit scores, the higher yours, the easier it will be to maintain positive financial behaviors that translate into a higher credit score.
Suppose you have $ 20,000 in savings and a surprise bill costs you $ 2,000. If you are able to tap into your cash reserves and fully cover that bill, you won’t need to charge it to a credit card, which could lead to increased usage and lower score.
Plus, the more access to wealth you have, the less likely you are to fall behind on your existing bills. If you are forced to take a pay cut at work but have a lot of money in savings, you may be able to meet all of your obligations until you find a way to replace that lost income. In this case, having higher equity can indirectly help your credit score by preventing you from making late payments.
How much should you focus on your net worth?
All in all, your goal should be to see your net worth increase over time. This does not mean that it will increase every year. You may see your net worth go down some years, depending on how the circumstances unfold. You shouldn’t blame yourself if this happens.
There are many factors that can cause your equity to drop, such as if you own stocks that go down in value or house values start to fall. Rather, your goal should be to build more and more wealth through tactics such as saving and investing.
Even though having higher net worth doesn’t guarantee you a higher credit score, it could help you get there. The more affordably you can borrow, the easier it will be to build wealth over time.
The best credit card cancels interest until 2023
If you have credit card debt, transfer it to this top balance transfer card guarantees you an introductory APR of 0% until 2023! Plus, you won’t pay any annual fees. These are just a few of the reasons our experts rank this card among the best to help you get your debt under control. Read the full review of The Ascent for free and apply in just 2 minutes.