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