A High Credit Score Is Not the Best Indicator of Financial Health

• As a financial planner, I find that many of my clients are obsessed with having a high credit score.
• A high score is important for borrowing money, but there’s not much benefit after reaching 760.
• Your net worth and debt-to-income ratio are more important factors when measuring financial health.
• Read more from Personal Finance Insider.

As a financial planner who works with high-earning young professionals, I often see an unhealthy obsession with credit scores.

Clients who are obsessed with having the highest credit score possible will sometimes ask me if they should take out an additional credit card to improve their credit score. I’ll explain to them that their current score is considered excellent in most cases, and just increasing their score by a few points won’t help them qualify for lower loan rates or better lending terms.

Credit scores are not a measure of your financial health

Contrary to popular belief, a high credit score is not a measure of financial health — it’s a measure of your ability to take on debt.

Credit scores are calculated based on a number of factors stemming from data in your credit report. These factors do not take your income, savings, or investments into consideration.

For example, a person who makes $200,000 per year could have very little savings and be over $1,000,000 in debt between a house, car, student loans, and credit cards — but even if they’re overspending and living paycheck-to-paycheck, they could still have excellent credit.

One’s net worth and debt-to-income ratio are better indicators of financial health.

Net worth is your total financial assets (what you own) minus your debt (what you owe). In the example above, this person’s net worth is low. They’re most likely not prepared to handle an unforeseen expense and are probably behind on saving for retirement or other financial goals.

Your debt-to-income ratio is the total amount you owe on debts every month, divided by your monthly income. The more debt you have, the higher your fixed expenses.

A high debt-to-income ratio can lead to more stress, and you may have to resort to taking on even more debt just to get by. Many lenders calculate this number in addition to reviewing your credit score to determine your ability to repay a loan.

Your credit score only matters in specific situations

Having good credit is certainly beneficial — but it’s only essential in some instances. Here are a few examples of when your credit score matters:

Taking out a loan or getting a new credit card

Whether it’s a mortgage, car loan, or credit card, a higher credit score makes it easier to borrow money when you need it. Not only is it easier to qualify for new loans, but you may also receive lower interest rates and more favorable loan terms from lenders.

Leasing an apartment

Having bad credit can be seen as a risk even if you’re a renter. The landlord may require you to make an extra deposit, or have a cosigner before approving you for a lease. A good credit score makes the process much easier.

Using service providers

Some cable, cell phone, and internet providers use risk-based pricing, where they’re legally allowed to charge you more for having bad credit. Some utility companies may also use credit scores to determine if you’re required to make a deposit before using their service.

Purchasing insurance

In most states, homeowner and

auto insurance

companies can use what’s called a credit-based insurance score to determine your premiums. This score is based on your credit history, and a low score can result in higher premiums.

Some employers do credit checks (but they won’t see your score)

Depending on your industry, some companies require a background check as a condition for employment. Sometimes, this includes a credit check. While credit checks for employment don’t show your credit score, they do show your credit and debt repayment history.

That said, you still don’t have to achieve a perfect score to be seen favorably by lenders. In most cases, a score of 760 or higher is enough to qualify you for the lowest rates, and most favorable loan terms. Focusing too much effort on achieving a score above this number is purely for vanity metrics.

It’s more important to focus on overall financial health

Focusing on good financial health is far more important than achieving the highest credit score possible. To maintain good financial health, you should make sure you’re living within your means, saving as much as you can, and tracking your net worth over time.

You’re much better off looking for ways to increase your income, invest, and pay off any existing debts than focusing too much on your credit score. Also, by managing debt responsibly, you’ll have an easier time maintaining a good credit score and have access to credit when you actually need it.

Don’t apply for credit cards and take on additional debt just to improve your credit score. After all, the availability of credit in excess can actually incentivize you to spend more. 

Also, don’t be afraid to pay off large debts or close credit cards you’re not using. Rebuilding your credit score after a small drop is far easier than maintaining large sums of debt or being tempted to spend beyond your means.