Your Net Worth Statement Is.
Many of the people I talk to about money are obsessed with their credit report. And don't get me wrong, credit is important in some instances. But if you are looking for your grown up money report card, it's not your credit report, it's your net worth statement.
Many people I talk to who are just starting to pay more attention to their money are obsessed with their credit score. If you've been careless with your money or had a financial setback, it is understandable that your credit score may be low. But if you are looking for validation that your are on the right track financially, let go of the credit report and get to know the net worth statement.
Don't get me wrong – your credit score can be important. But remember why the credit report and credit score was invented. It's not a report card for grown ups meant to tell us how we are doing and the game of adulting. It was developed for financial institutions to share customer data so they could make better decisions as to who they should extend additional credit to.
So yes, if you are looking to take on more debt, your credit score is important. If you need to buy a new house or car, your credit score will impact whether or not the lender decides to have you as a client and the rate they choose to charge. In this scenario, a good credit score can help you make a purchase you want and to pay a bit less for the loan.
Credit score can also be important if you are looking to rent. Many landlords check applicants' credit scores before deciding to rent to them. Because the way you do one thing is the way you do everything, understanding your behavior patterns with your other bills help them to understand your likely behavior pattern in paying your rent on time or late.
If you are job hunting, many employers will check your credit report as a part of their due diligence before hiring you. In some ways this seems unfair – after all, if you've been out of work and unable to pay your bills, getting the job would automatically improve your credit, right? However, a really low credit score shows the potential employer a peek behind the curtain into your life. If your bills aren't getting paid, there are likely other areas of your life that are chaotic as well. You may not be the trustworthy and slightly boring employee they are looking for. This becomes especially important if you will be handling money in your new job.
But unless you are looking to take on debt, rent, or look for a new job, you should be 0% interested in your credit SCORE. You should, however, look once a year at your credit REPORT.
Your credit report is the underlying data that banks, credit card processors (like the place I used to work), and other lenders send to the credit bureaus each month to let them know what you've been up to. This data is the basis for your credit score. Your credit report data is important for more than just the fact that it contributes to your score, though. It's also important insight into how your name is being used. Checking your credit report periodically can be a great way to know if you are a victim of identity theft.
Because every “trade line” (record of debt in your name) shows on the credit report, if someone steals your identity and starts opening credit cards, those new cards will show up on the report. If this happens, you can then contact the credit bureau to dispute the item, and you can contact the issuing bank to let them know you did not authorize the account to be opened in your name. You should also contact local law enforcement to file a police report. It is your responsibility to make sure the data in your name is cleaned up.
In order to check your credit report, you should utilize the site annualcreditreport.com. By law you are entitled to get a free report from each of the 3 credit bureaus once a year. Therefore, you can check your credit data once every 4 months at no cost to you. There's no need to pay for an identity monitoring service or to pay to obtain your credit score. By reviewing your report once every 4 months and challenging any incorrect data, plus paying your bills on time, your credit score should be just fine in the event that you ever need it.
As I mentioned, your credit score is not your adult/money report card. It was not designed to show who is good with money and who is not. In fact, you could have two individuals with the exact same money behavior but quite different credit scores, as being “good with money” is not what is being measured.
As an example, my husband's credit score falls in the “excellent”category, and mine falls in the “good” category. But here's the kicker – my husband hasn't paid a bill since the 90s. So if “being good with money” were the only criteria, and the person paying bills for him and for me is the same person, we should have the same score, right? WRONG.
You see, at our last house the mortgage was in my husband's name. He was working a day job (in addition to moonlighting for STS), so it was much easier to show regular, normal person income for him. To make things easy for the bank, we put the house in his name. Because he has MORE debt and is paying that debt on time, he has shown that he can handle more debt than me in a way the banks like. You would think having more debt makes him more unable to pay his bills and therefore more of a risk, but that's not how the credit score is calculated.
So if you are looking to clean up your credit score as a way to prove that you are adulting with money correctly, you are barking up the wrong tree. Yes, your credit score can be important, and it is valuable to check your credit reports throughout the year. But it is not your grown up report card.
If you are looking to prove you are winning the money game, it's your net worth, not your credit score, that you should be focused on. But that's a separate post.
How do you know if you are winning with money?
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