How Does Your Credit Score Impact Net Worth?

Your credit score and your net worth are two numbers that can have a big impact on your life — and sometimes cause anxiety — but they aren’t mutually exclusive. You don’t have to have good credit to have high net worth, just as everyone with excellent credit, unfortunately, isn’t rich.

However, unless you stand to inherit millions, maintaining a high credit score is arguably a foundational requirement for growing your net worth to a large enough sum that you can comfortably retire or enjoy the freedom to make life decisions without the stress of having to go into debt or make huge sacrifices.

Below, we explain the relationship between net worth and credit score so you can feel fully in charge of both. But first, here’s a refresher on what net worth actually is.

Net worth is simply a phrase referring to the total amount of money you have minus your debts.

The concept of net worth matters because one day, you’ll probably want to stop working. High net worth individuals can breathe easy knowing they have a safety net of cash, investments and property valued high enough to cover their living expenses (and then some).

According to the Fed’s latest Survey of Consumer Finances, the average net worth of U.S. households is $748,800. The most affluent U.S. households skew the proportions, resulting in an average that’s well above most people’s realities. A better indicator is the overall median net worth of U.S. households, which is $121,700.

Anyone can benefit from knowing their net worth and working toward increasing it. This number can be stressful if you’re carrying a lot of debt. Yet, it can be helpful for you to be able to think about your financial situation in a bigger context.

To calculate net worth, add up your assets (the cash you’ve got in bank accounts, investments, retirement accounts, etc. as well as the value of any properties you own) and then subtract any liabilities (debt, including student loans, credit card, your mortgage, etc.) that you owe.

Net worth = assets – liabilities

Having an excellent credit score qualifies you for the best interest rates when you apply for financial products. This is important when you want to borrow money affordably, which most of us want to do at some point or another.

Banks charge you more to borrow money when your credit score is low. They assume that someone with a bad credit score is a “higher-risk” borrower who may not pay back the money in a timely way. So lenders compensate by charging more for debt.

Putting aside factors like generational wealth, income inequality and career opportunities (which are, admittedly, huge obstacles on the journey to wealth), credit score is one area of focus that most people have control over.

Imagine this scenario: You’re buying your first house (hooray!). It costs $200,000. You’re prepared to make a 20% cash down payment ($40,000) and get a mortgage to cover the rest ($160,000).

According to FICO, borrowers with an excellent credit score of 760 or above can expect to receive interest rates of 2.696% for an average 30-year mortgage at the time of writing this article. Those with FICO scores of 620 to 639 (which is in the fair range), on the other hand, are looking at average interest rates of 4.285%.

Using a mortgage calculator, you can see how much money you’ll spend over the 30-year, $160,000 mortgage for both interest rates.

Interest rate comparison for a $160,000 mortgage

• Interest rate A (760+ FICO score): 2.696%
• Interest paid over 30 years: $73,502.66

• Interest rate B (620 to 639 FICO score):…