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Why is your credit score not a good indicator of your financial well-being?

minute read

    A credit score is a valuable tool that helps indicate your level of risk to lenders and credit card issuers. It's a score that gives an idea of your financial behavior, but it's not the only way to determine your ability to handle money. While a credit score can be helpful when negotiating terms around a loan or getting approved for credit cards, credit scores don't necessarily capture your financial well-being and wealth as a whole.

    In this article, you will learn:

    • If a high credit score is a sign of wealth
    • How your credit score can affect your wealth
    • What an ideal credit score is to become wealthy

    Is a high credit score a sign of wealth?

    Your credit score is an aggregate measure of your financial behavior, but it can only capture so much. It takes into consideration factors including, but not limited to:

    • Payment history
    • Credit mix
    • Credit age/length
    • Credit utilization

    Some of these credit score factors that generate a high credit score have less to do with how much money you have and more about how you handle it. For example, a good credit utilization ratio to shoot for is 30% or lower — this is true regardless of if you are wealthy or not. The same goes for payment history. You could have tons of money to spare — but if you don't pay your monthly bills on time, your credit score will suffer.

    Your financial well-being is the overall health of your financial status, outlook and behaviors. Having a great credit score can provide you with access to lower annual percentage rates (APRs) and premium credit cards, but that doesn't mean you don't have debt, or that you don't have some unhealthy spending habits.

    On the other hand, your credit score doesn't account for certain factors — like your income, investments and more — so it can't be used solely as an indicator of how wealthy you are in terms of money, assets or your personal financial literacy.

    How can your credit score affect your wealth?

    Wealth isn't just about how much money you have — it accounts for assets like your home or car. To pay for these things, you may need to take out a loan — and that's where a good credit score can help you.

    Your credit score can help you achieve certain goals more easily (or with better terms) if it's in good standing. A higher credit score may grant you greater access to funds that you may not otherwise have if your credit score was poor.

    Additionally, you could get a lower APR on a car loan or mortgage, which could save you money in the long run. Having more opportunities to save can increase the likelihood of generating wealth and building a strong credit history over time.

    As you mature in life and both your financial prospects and aspirations change, having a good credit score can help you stay on track and acquire wealth and build credit over your lifetime.

    What is an ideal credit score to have to become wealthy?

    You don't need to have a good credit score to be wealthy and vice versa. Wealth is not an indicator of how well you handle your money. You could have wealth, but you may still find it difficult to live within your means or have outside factors affecting how much money you spend and save. Over time, this could hurt your credit score.

    In that respect, a good credit score doesn't necessarily mean you are wealthy. It may mean, however, that you have a high level of creditworthiness — something lenders weigh very highly when making decisions on loans, mortgages and credit card approvals. If you're unsure what your credit score is or how to increase it, you can enroll for free in Chase Credit Journey®. Here you can learn about the factors that make your credit score and get a free personalized action plan provided by Experian™ to help increase it. This can help you conceptualize and plan how to improve your score over time.

    In general, someone with a quality credit score likely knows how to handle their money responsibly and will be able to get access to all the benefits that come with that (cards with plenty of perks, higher credit limits, etc.) A good credit score to aim for is a VantageScore® of 661-780 and a FICO® score of 670-739. These ranges can help you pursue your financial goals.

    In conclusion

    Your wealth is not determined by your credit score, and vice versa. Your financial well-being as a whole takes into account many factors such as your income, investments, assets, credit score and more. While your credit score is often a helpful tool to determine your creditworthiness, it does not necessarily indicate your ability (or inability) to manage your finances or accrue wealth.

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