Does Your Net Worth Impact Your Credit Score?

A higher net worth is a good thing. But will it help your credit?

Your net worth is something you may not think about all the time. But you're probably aware that the higher it is, the more financial stability you enjoy.

Your net worth is measured as the total value of your assets minus your liabilities. Imagine you have $20,000 in savings and own a home worth $350,000. Let's also assume you have a $5,000 personal loan to pay off and owe $200,000 on your mortgage. At that point, you're looking at a net worth of $165,000.

Seeing your net worth increase is something to be proud of, but will a higher net worth help your credit score?

How credit scores are calculated

There are five different factors that go into determining credit scores:

1. Payment history, which speaks to how timely you are with bills
2. Credit utilization, which speaks to how much of your total revolving credit line you're using at once
3. Length of credit history, which shows how long you've had open accounts
4. Credit mix, which is a measure of the different types of credit accounts and debts you have
5. New credit accounts, which speaks to how many new loans or credit cards you've applied for recently

As you can see, net worth is not on this list. And as such, having a higher net worth won't automatically result in a boost to your credit score. While having money in savings and owning a home might lead to a healthier financial picture for you, it won't turn a credit score of 650 into a 750.

In fact, it's possible to have a high net worth but do a poor job of managing debt and bills. In theory, someone could have an impressive net worth and a lousy credit score.

How a higher net worth could help your credit score

Though net worth is not a factor that goes into calculating credit scores, the higher yours is, the easier it'll be to uphold positive financial behaviors that lend to a higher credit score.

Say you have $20,000 in savings, and a surprise bill strikes that costs $2,000. If you're able to dip into your cash reserves and cover that bill in full, you won't need to charge it on a credit card, which could cause your utilization to rise and your score to fall.

Furthermore, the more wealth you have access to, the less likely you'll be to fall behind on your existing bills. If you're forced to take a pay cut at work but have lots of money in savings, you might manage to keep up with all of your obligations until you find a way to replace that lost income. In that case, having a higher net worth may be indirectly helping your credit score by preventing you from making late payments.

How focused should you be on your net worth?

All told, your goal should be to see your net worth increase over time. That doesn't mean it'll increase every year. You may see your net worth decline some years, depending on how circumstances play out. You shouldn't beat yourself up if that happens.

There are many factors that could cause your net worth to drop, such as if you own stocks whose value declines or if home values start to fall. Rather, your goal should be to eventually build more and more wealth through tactics like saving and investing.

Even though having a higher net worth won't guarantee you a higher credit score, it could help you get there. The more affordably you're able to borrow, the easier it will be to build more wealth over time.