Excellent Credit Score Does Not Mean You Are Better Financially
What is Excellent Credit Score?
You are said to have excellent credit score if your FICO credit score is 800 and above. With VantageScore ranking, you only need to have 750 and above to be considered as having excellent credit score. With these credit scores, you tend to have access to loans at best interest rates because the lenders will believe that you are creditworthy and that you will pay back the loans if granted. People with exceptional credit score don’t attain that level overnight. It is an outcome of good payment history coupled with the responsible use of their credit cards. If you have excellent credit score, you will not only have access to loans at best rates, you can also enjoy cheap insurance rates.
How long does it take to have excellent credit score? To some, it may take years for them to attain that kind of credit score while some can achieve it within 30 days. How can someone have exceptional credit score within 30 days? Am I not contradicting myself? No, I am not contradicting myself. I still maintain what I said that you don’t have exceptional credit score overnight. But there are people who are already having a very good credit score. FICO’s credit score range for good credit score is from 740 – 799. So, for somebody whose credit score is already 799, it may not be difficult for such person to move from a very good credit score to excellent credit score within a month by just adding one point to his existing credit score. Excellent credit score is the wishes of many people and it is actually a good thing to have. But there is something I want you to know. Having an exceptional credit score may not make you better financially. What? Yes, you heard me right. Having an excellent credit score is a good goal to pursue but the irony of it is that it does not mean that you are doing well financially.
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The reason is that, there are very important parameters that credit rating agencies don’t take into consideration while calculating your credit score. Mostly credit score revolves around debts. That is, you need to go into debt, keep the debt for a considerable long time while you meet your obligations on the debt as at when due. For instance, FICO uses the parameters to calculate your credit score:
Credit history – 35%
Debt level – 30%
Length of credit – 15%
New Credit – 10%
Type of Credit Used – 10%
You can see from the above that credit score is all about your credit information. That is why credit score may not be a good yardstick for measuring your financial stability. Your financial stability should have more to do about the following.
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Your income: How much income do you earn? How many sources of income do you have? How diversified are the sources of the income? Do you know that an employee earning just $3,000 per month can have a better credit score than somebody who earns $100,000 every month from well diversified portfolio? For an employee receiving $3,000 monthly to be bragging about his excellent credit score to the person with $100,000 monthly income from a well-diversified portfolio will be an illusion. If the two of them should approach a bank for a mortgage, don’t be surprised if the application of the person earning $3,000 monthly is turned down while the application of the other person that earns $100,000 monthly income with very good credit score is approved. The reason is that, even though you are considered to be creditworthy, the bank will still consider your ability to pay back the mortgage. If your income level cannot support the repayment of the mortgage loan you are applying for, no bank will grant you such mortgage.
Debt to income: This is very similar to the above. But two persons can be earning the same income and they are not ranked the same financially. If both of them earn $100,000 monthly while one is having very high debts consisting $37,500 student loans, $9,000 auto loan and $25,000 credit card debts while the other just has $500 card balance, you will agree with me that one is better financially. Their credit scores notwithstanding.
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Your networth: What is your networth? Networth is calculated by deducting all your debts from your assets. Your assets include your cash at hand, cash in your savings and deposit accounts, your investments and other property. It is possible to have exceptional credit score without having anything to boast of as your networth.
Therefore, you should not just pursue building exceptional credit score without taking into consideration how you are actually standing financially. Personally, I would rather focus on building my networth than pursuing having excellent credit score. However, it is possible to achieve the two at the same time.