Your personal net worth and credit score are perhaps the two most important numbers that measure your financial health. While it can be hard to calculate your personal worth, your credit score is easy to access and interpret. The two are correlated in that individuals with high net worth tend to have higher credit scores. To calculate your credit score, however, rating agencies use figures other than net worth.
Personal Net Worth
Personal net worth equals the sum of all of your assets, minus all of your liabilities. While the formula is simple, actually putting a dollar figure on assets can be fairly difficult. A family ranch in a remote area with few properties nearby can be nearly impossible to value accurately until you put it up for sale. Similarly, you may assume that the antiques inherited from your grandparents are worth a fortune -- until an assessor tells you that they are worth next to nothing. Liabilities are easier to track because they typically carry a dollar value.
Your credit score is a numeric value that assesses your creditworthiness. The higher your credit score, the more likely you are to honor your payment obligations. A high credit score therefore means a lower default risk for the institution lending you money. Consequently, those with higher scores tend to have an easier time getting loans. They also get charged lower interest rates for home mortgages, car loans and other types of credit. It is important to keep a close eye on your credit score and take steps to raise it by making timely payments and keeping debt manageable.
Calculating Your Credit Score
Your personal net worth will not directly impact your credit score, since it is not one of the numeric inputs used in the calculation. Instead, your credit score is determined by the timeliness of your debt payments, how much you owe in total, how actively you sought new loans in the recent past, what kinds of loans you carry, and how far back your credit history goes.
Net Worth and Loan Applications
While your personal net worth will not directly impact your credit score, your assets and liabilities can still play a role in your creditworthiness. When applying for a home loan, for example, the bank or credit institution may ask you to list your assets as well as your liabilities. Some banks calculate your net worth and others use proprietary formulas, whose results closely mimic your net worth. Assets that can easily be converted to cash matter more than assets that would take awhile to sell in case of financial need. Stocks and bonds, for example, can help you qualify for a loan, while your antique furniture may not.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.