Why Your Credit Score Probably Doesn’t Matter That Much

Many people’s first financial education is on the value of your credit score. As teenagers go off to college, parents talk to their kids about the importance of “building credit” and get them started on their first credit card. While there is a little truth to this, the FICO score is not the foundation of financial health that many people think it is.

This early lesson tends to stick with people, and I often talk to people who continue to mention their score and particularly how some change to their finances might adversely affect it. The reality is that for most of them, their score is now irrelevant. But that is not how most feel – they truly believe that they must optimize for the best score possible.

I have met people with great credit scores but poor overall financial health.

Your credit score says the following things about your finances -

1)      You have been borrowing for a long time (length of credit history)

2)      You don’t spend too much of what you are allowed (utilization)

3)      You borrow in different ways (credit mix)

4)      You make your debt payments on time (payment history)

5)      You have recently borrowed (new credit)

Your credit score says nothing about the following -

1)      Are you saving an adequate amount to reach your financial goals?

2)      Are you prudently investing your savings?

3)      Are you miserable because your debt payments are too high a portion of your income?

While having a good credit score is helpful (usually anything over 740), don’t worry about optimizing for a perfect score. That time and focus are much better spent on other areas of your finances like income, savings, investments, giving, and overall financial habits.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.