Today I’m going to talk about something that really cooks my grits. It’s something I see often as a personal finance coach: Credit Score obsession.
A lot of people come to me with questions about their credit score. How to improve it, how to avoid lowering it. How to get to the elusive 850. And many people I meet are obsessively focused on this one number.
Now, you may not love this, but I’m here to tell you that you’ve been hypnotized. Yes, your credit score is important. But you also have to keep it in perspective. Good credit impacts you the most when you’re buying a home, a car or getting approved for an apartment.
Beyond that, it’s mostly there to help you get more credit. And far too often, I see bad money habits being justified in the name of “having a good score.”
I’ve seen people run up large balances on their cards in order to “keep a good score.” Meantime they’re paying hundreds if not thousands of dollars in interest payments over time in the name of “having good credit.”
I’ve seen people use the credit score thing as an excuse to charge much more on their cards than they can allow in their budget “because of the rewards” (which rarely add up, by the way.) Then they say: “plus, it builds my credit!”
Look. There are very few times in life that you’ll find yourself in a “credit score emergency.” Meaning, if you don’t come up with good credit in 48 hours you’re cooked.
For the most part, the bigger ticket purchases like a car or home that require good credit are decisions that requires months if not years of planning and saving. Use that planning time to focus on improving your score.
But if you’re focusing too much on having a high score while other areas of your finances need attention, then you’re using FICO as a distraction. Sorry Suze Orman.
Your credit score is just one of the ways you measure overall financial health.
Based on years of studying and coaching people in this area, here are some other areas of your financial life that need to be measured as well.
- What is your NET worth? Do a balance sheet. Money you owe goes on one side and the estimated value of all your assets go on the other side (including cash savings). What’s the net difference? Is it positive? If you have a great credit score but you’re in the red, ask yourself: how is this fabulous credit score going to increase my net worth?
- What is your dominant emotional state around money? RARELY is this addressed in personal finance books. But it’s extremely important. If you were to rate your dominant feelings around money on a scale of 1-10 where 1 means you feel hopeless, depressed, terrified and 10 is joyful, abundant and happy, where do your emotions fall most often? If you’re not at least a 5 or 6, you want to pay closer attention to your feelings.
Ideally, financial health means more than just having a good credit score. It means moving towards a positive net worth and emotional state around money, too.
Take a holistic approach to your money instead of focusing on this one number. There’s so much more to your finances than that.