Reasons Why it is More Fun and Logical to Monitor Net Worth not Credit Scores

September 3, 2008 by  
Filed under Debt and Credit, Financial Planning

Today’s post is about tracking your personal net worth and your credit score as an enjoyable activity and as measure of financial success.  This article addresses the relative merits in a personal financial plan of monitoring your net worth as compared to your credit score.  In that sense, this post can be considered to be Part 3 of my Campaign Against Credit Score Obsession.  (Here are Part 1 and Part 2 if you want to read them first.)

Before we begin with the list, let’s get our definitions straight.  By “credit score” (also known as the FICO score), I am referring to the credit scoring algorithm developed by Fair Isaac Corporation, and the various credit scores that are generated and manipulated using the FICO scoring algorithm, as applied to an individual’s credit history.

By “net worth”  I am referring to the arithmetic amount by which the sum total of a person’s assets (including cash and investments) exceeds that person’s short and long term liabilities.  Note that I optimistically used the word “exceeds” in the explanation.  Sadly, for a lot of people (and particularly for people obsessed about their credit score), their “net worth” is actually negative number.  Mr. ToughMoneyLove wants this trend reversed and offers this list of fun and logical reasons for keeping your focus where it should be.

Your Net Worth is a Single Number not a Collection.

It turns out that the geniuses who have inflicted credit score madness upon unsuspecting consumers were not satisfied with having a single number.  Instead, the scores reported by the three major credit bureaus can be different at any given point in time.  On top of that, the various banks, creditors, and other users of the credit scores now tend to generate yet different calculations for their own use, based on the consumer’s FICO score data.  It is impossible to keep track of all these variations and permutations.  Your net worth is a single number that is based on a standardized formula.  (Some personal finance experts argue that a personal net worth calculation should exclude equity in your personal residence, but we won’t quibble about that now.)

You Can Monitor Your Net Worth for Free

To monitor your credit score, you need to subscribe to one of the score tracking services, for a fee.  Not coincidentally, these fee-based monitoring services were introduced by the very companies that have persuaded consumers how important their credit score is.  These include the deceptively named “freecreditreport[dot]com.”  Do you see a pure profit-motive pattern here?  On the other hand, you can calculate and track your net worth with a pencil and paper.  If you want to get fancy, you can use personal finance software. such as Quicken or Microsoft Money.  Of you can use one of the free online budget tools.

There are No False Positives in Your Net Worth

If you owe more than you own, your net worth is a negative number.  That’s the way it should be – it sticks out like a sore thumb.  If you have an awful credit history, your credit score is still 300!  Hey, that doesn’t sound so bad, does it?  Actually it is that bad.  But the credit industry doesn’t want you to feel bad by seeing a negative number or even a zero.  That might discourage you from continuing to use credit.

You Can have a High Credit Score and Still be Broke

What is a “broke” person?  In my opinion, that is someone who lives paycheck to paycheck, does not save, has no cash reserves, and often uses credit to make ends meet.  As long as that broke person makes timely payments on his or her credit obligations, and has not used all of their available credit, that person can have an excellent credit score.  Why?   Fair Isaac and its credit industry co-conspirators don’t care what assets you own, what you earn, or whether you have a positive cash flow.   All of those positive financial indicators get in the way of their primary objective, keeping you as a habitual credit user.   You can even retire with a high credit score.  But retiring with a high credit score won’t save you from using food banks if you have no money.

Your Net Worth Has No Upper Limit

As you accumulate wealth, your net worth number continues to get larger.  On the other hand, even if you are a credit master, the highest score you can have is 850.  That’s no fun.

You Control Movement of your Net Worth- not Unknown Vendors and Creditors

One of the big problems with credit score obsession is not understanding what appear to be random up and down movements of your score, based on events over which you have little control.  Very frustrating.  Compare that to your net worth number.  It’s a simple calculation – not some mysterious algorithm.  All you have to do is spend less and save more and that thing is moving up.  Very satisfying.  Even better, when you are properly invested, your net worth can grow without you doing anything.  Try that with a credit score.

Only Financially Successful People Have a High Net Worth.

Anyone with an upside down car loan or a credit card and enthusiasm for using it can have a high credit score.  If you have a high net worth, you are a success in the eyes of anyone who understands money and personal finance.  Not so with a high credit score.

You Can Spend Net Worth and Give Part of it to Charity.

You can’t spread the love based only on a high credit score.  If you did, your score might go down.  If you try to bequeath your credit score in your will, your heirs will not have fond memories of your generosity.

A Growing Net Worth is a Sign of Discipline and Hard work.

A growing credit score is a sign of ….  a growing credit score.  It takes planning, money discipline, and hard work to grow your net worth.  Most people acknowledge and respect these qualities, even more so now because they are increasingly rare in our consumerist society.   Don’t you want to join this exclusive club?

FICO is a Four Letter Word.

You bet it is.  Well, at least it is in Mr. ToughMoneyLove’s book!  Don’t you agree that “Net Worth” looks a lot better than “FICO”?

That’s my list.  Do any of you have reasons to add?


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8 Responses to “Reasons Why it is More Fun and Logical to Monitor Net Worth not Credit Scores”
  1. Consider me a footsoldier in your Campaign Against Credit Score Obsession, although I’ll admit to checking mine yearlyjust to make sure there’s nothing funny going on.

    Net worth is definitely a better indication of a person’s financial stability, but only when it’s viewed as part of the larger trend. Having a net worth of $100,000 isn’t necessarily good or bad- if last year it was $400,000, it’s an indication of trouble; if a year ago it was $0, it’s indicative of success.

    Of course, tracking net worth isn’t as fun as credit scores because you don’t get a pretty graph that tells you how good or bad of a person you are relative to everyone else. How on earth can you measure your self worth and value as a person without a percentile ranking? ;)

  2. Great article. I find it funny how people measure themselves by credit score or even income. Both of those are great but don’t give an accurate assessment on where someone is at financially. If someone makes $300,000 per year and has a great credit history but is spending $320,000 per year, he is worse off than someone who makes $40,000 per year but spends $30,000 per year.

    Personally, I wish I could have zero Credit Score because of zero Credit History. I’d prefer to pay cash for everything. But alas, that’s almost impossible these days.

    @ MoneyGrubbingLawyer
    I think comparing yourself to others is an issue that gets people into debt in the first place. However you can use such competition to your advantage if you look at net worth in this way:

    How many years could you survive without a single source of income?

    This is a tough challenge because it takes Net Worth a step further. For instance, I have a house worth somewhere between $330,000 and $350,000 in this current market. I have my mortgage paid down to about $140,000. This gives me a Net Worth of $200,000 in my house alone. However if both my wife and I lost our jobs today, we could survive maybe 1 month on our current savings.

    Personally, even though I have a respectable Net Worth, I don’t consider myself in a “good” place. Now I am working on this (I actually had a decent savings until my car broke down and it cost $1200). My short term goal is to be able to survive for at least 1 year with no income. My long term goal is to survive at least 15 years with no income. Part of this strategy is to pay off debt such as my house and the like. This increases the ability to survive without income as my expenses are minimal and my savings can go a lot further.

    But I believe that’s the best way to judge how you are doing financially. Credit Score, Income and even Net Worth are all great. But when the pressure is on, those things alone will not save you in a financial crisis.

  3. MGL – A growing net worth is the goal as long as you don’t fret too much over dips caused by paper losses on your investments.

    WiseMoney – Your comment supports the argument of some that equity in your personal residence should be excluded from your net worth as a young adult, because it is not an asset that you are going to liquidate in a crisis. That is why I do not favor rapid paydown of your home mortgage loan until you have enough liquid assets to sustain you through a financial crisis.

    Also, my middle son (age 23) is financially independent, debt free and has no credit score. He was turned down trying to open an online savings account because of it, if you can believe that.

  4. MasterPo says:

    Good article.

    While I agree with net worth being a better indicator, I would say that’s a personal tracking tool. The world uses your credit report and score for everything from mortgages to job applications (I don’t approve of that but it’s the way things work nowadays) to insurance rates. So you really can’t dismiss your credit score.

  5. A good post, going against the grain of popular thinking. I agree with you – even if I know my credit score is 777, I don’t know what the “pass mark” with a certain bank will be on any given day. In the UK banks and building societies change their acceptance level daily as they try to control their business levels. I assume it is the same in the USA.

  6. Uncommon – Thanks for your visit. One of the problems here in the US is that banks and other financial service companies will often take a raw FICO score then manipulate it with their own algorithm to produce yet another internal credit score. The consumer has no idea that this is happening or how it is happening.

  7. RC Brooks says:

    I am unlike many on here, in that I have had a great deal of financial trouble in the past. It has taken a long time to get in control of my bills on my budget. In a funny turn of events, due to not having any credit, it taught me how to live off cash. While even today, my credit score is certainly low (haven’t checked in more than a few years) I can say that I could pay all of my bills off in a single month if need arose, save for my home which I bought on contract with a reasonable interest rate. While I may not have the nicest or greatest of anything, I know that in the worst case scenario I am capable enough to trudge through economic downturns. Further, I don’t feel enslaved to the places I work for the fear of becoming a transient.

    With regards to calculating net worth, it is nice to know I have tangible assets as opposed to dancing to another’s music.

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