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Most Americans see a high credit score as an indicator of doing well financially. Find out why that’s not always the case. [[{“value”:”
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It’s good to have a high credit score. There are certain times in life, like applying for a mortgage or an apartment rental, when your credit is going to make a big difference.
But there’s also a common misconception that a high credit score is a sign of financial success. That’s something 84% of Americans believe, according to a recent report by Ramsey Solutions. This kind of thinking can give you a false sense of security about your finances. If you’ve been using your credit as a gauge of your success, it’s best to rethink that.
Your credit score is only a small part of your financial situation
It’s not too complicated or hard to get a high credit score, once you know how to do it. You’ll have a high score if you get in the habit of:
Always paying your bills on timeNot borrowing too much on your credit cards
To be clear, these are both great habits. You should make it a goal to pay every bill on time and avoid charging too much on your credit cards. Ideally, you’ll also pay off your credit cards in full every month so you aren’t charged any interest.
However, your credit score is really just a gauge of how you manage credit, including your credit cards and loans. That’s only one part of personal finance. Your credit score isn’t based on how much you have in your savings account, your investments, or your income.
It’s good that you can get a high credit score even if you don’t have a large income or a lot of money saved. If those were requirements, it would be much more difficult for people to build credit and quality for top credit cards. But this also means excellent credit isn’t always a sign that you’re doing well with money. After all, it’s possible to have a high credit score even if you:
Live paycheck to paycheckHave nothing in your savingsHave no retirement accountsPay for a car loan or mortgage you can barely afford
A high credit score is valuable. If you don’t have one yet, then it’s certainly smart to improve your credit score. But there’s much more to financial success.
What does it mean to be financially successful?
There are several signs of financial success. If you’re trying to evaluate your own financial situation, or if you want to improve it, here’s what to aim for:
You earn enough money to pay your bills, save, and invest every month. It’s generally recommended that you save at least 10% of your income and invest another 10%.You have an emergency fund that can cover at least three to six months of living expenses.You don’t have any high-interest debt. The most common type of high-interest debt in the United States is credit card debt.You set financial goals, such as saving a certain amount for retirement or increasing your income by $5,000 this year.You feel confident about your finances. Money isn’t a source of stress for you, and you don’t need to internally debate whether you can spend $20 here or there.
If you can say yes to all of those, then you’re in a secure financial position. Keep doing what you’re doing and setting new money goals for yourself as you go.
If you’re not there yet, that’s fine. Many people aren’t. To give you one example, Americans have a median savings account balance of $1,200, according to research by The Motley Fool Ascent. That’s nowhere near the three to six months of expenses recommended for an emergency fund.
Use each of those items above as goals, and set up a step-by-step plan to reach them. For example, three to six months of living expenses is a lot of money. You can’t build that up overnight. But you can commit to saving $100, $200, or $500 a month toward your emergency fund. Start by setting a goal of saving one month of expenses. After that, you can move on to two months, and then three.
Financial success is about more than a high credit score. If you have excellent credit, you should be proud of that. Just make sure you also focus on other parts of your finances, too, including how you manage your money.
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