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The median American net worth is $121,700—here's how your credit score can impact your net worth
Credit and net worth might seem like two separate ideas, yet they work together to save you money and build wealth.
Your credit score and your net worth are two numbers that can have a big impact on your life — and sometimes cause anxiety — but they aren't mutually exclusive. You don't have to have good credit to have high net worth, just as everyone with excellent credit, unfortunately, isn't rich.
However, unless you stand to inherit millions, maintaining a high credit score is arguably a foundational requirement for growing your net worth to a large enough sum that you can comfortably retire or enjoy the freedom to make life decisions without the stress of having to go into debt or make huge sacrifices.
Below, we explain the relationship between net worth and credit score so you can feel fully in charge of both. But first, here's a refresher on what net worth actually is.
What is net worth?
Net worth is simply a phrase referring to the total amount of money you have minus your debts.
The concept of net worth matters because one day, you'll probably want to stop working. High net worth individuals can breathe easy knowing they have a safety net of cash, investments and property valued high enough to cover their living expenses (and then some).
According to the Fed's latest Survey of Consumer Finances, the average net worth of U.S. households is $748,800. The most affluent U.S. households skew the proportions, resulting in an average that's well above most people's realities. A better indicator is the overall median net worth of U.S. households, which is $121,700.
Anyone can benefit from knowing their net worth and working toward increasing it. This number can be stressful if you're carrying a lot of debt. Yet, it can be helpful for you to be able to think about your financial situation in a bigger context.
To calculate net worth, add up your assets (the cash you've got in bank accounts, investments, retirement accounts, etc. as well as the value of any properties you own) and then subtract any liabilities (debt, including student loans, credit card, your mortgage, etc.) that you owe.
Net worth = assets - liabilities
Why a high credit score is so important
Having an excellent credit score qualifies you for the best interest rates when you apply for financial products. This is important when you want to borrow money affordably, which most of us want to do at some point or another.
Banks charge you more to borrow money when your credit score is low. They assume that someone with a bad credit score is a "higher-risk" borrower who may not pay back the money in a timely way. So lenders compensate by charging more for debt.
Putting aside factors like generational wealth, income inequality and career opportunities (which are, admittedly, huge obstacles on the journey to wealth), credit score is one area of focus that most people have control over.
How a good credit score helps you build wealth
There are a number of ways that your credit score can either contribute to growing your net worth or drain your resources.
Imagine this scenario: You're buying your first house (hooray!). It costs $200,000. You're prepared to make a 20% cash down payment ($40,000) and get a mortgage to cover the rest ($160,000).
According to FICO, borrowers with an excellent credit score of 760 or above can expect to receive interest rates of 2.696% for an average 30-year mortgage at the time of writing this article. Those with FICO scores of 620 to 639 (which is in the fair range), on the other hand, are looking at average interest rates of 4.285%.
Using a mortgage calculator, you can see how much money you'll spend over the 30-year, $160,000 mortgage for both interest rates.
Interest rate comparison for a $160,000 mortgage
- Interest rate A (760+ FICO score): 2.696%
- Interest paid over 30 years: $73,502.66
- Interest rate B (620 to 639 FICO score): 4.285%
- Interest paid over 30 years: $124,538.85
As you can see, having a higher credit score would result in a lifetime savings of $51,036.19.
But now, let's break it down further. When you compare the monthly payments of each mortgage size, things get even more interesting.
- Monthly payment A (760+ FICO score): $648.62
- Monthly payment B (620 to 639 FICO score): $790.39
Higher credit scores result in lower monthly payments. When banks charge you less to borrow, you can feel that savings immediately. A higher interest rate equals higher monthly payments. In this case, having a lower credit score means the borrower is paying $141.77 more each month.
Now let's use a compound interest calculator to look at how much your net worth would grow if you chose to invest that $141.77 savings. We assumed a 8% annual return, which is roughly what the S&P 500 has historically averaged.
- Starting balance: $0
- Monthly investment: $142
- Years to grow: 30
- Future balance: $213,042
So not only can good credit save you money, but if you invest it smartly, it can lead to a $200,000 boost in your net worth. Assuming you also pay off your mortgage in full, and the home appreciates in value over the next 30 years, your net worth could be well over $400,000.
How to monitor and improve your credit score
Credit monitoring services can be essential when you're working to improve your credit score.
Without a lot of hassle, you can sign up for free services like CreditWise® from Capital One and Experian free credit monitoring, which will help you stay on top of activity reported to the credit bureaus. This can help you spot fraud quickly enough to stop long-term damage to your credit score.
To build your credit, commit to making all your payments on time — this has the biggest impact on your score. Keep your credit usage on all your cards low compared to the size of your credit line. Limit new credit applications to only when you need a new product or loan (too many applications can ding your score since lenders perceive that as borrowing more than you may be able to comfortably afford).
If your credit is damaged, use a secured card, or become an authorized user on someone else's card (ideally a trusted family member), as you take steps to repair your history. You can also check out *Experian Boost™, which is free to use and may raise your FICO® Score by counting your on-time monthly utility, cell phone and streaming service bills.
Ready to get started? Check out our list of best credit-building cards to repair or improve your credit.
Best overall free credit monitoring service
CreditWise® from Capital One
Credit bureaus monitored
TransUnion and Experian
Credit scoring model used
Dark web scan
Best runner-up free credit monitoring service
Experian Dark Web Scan + Credit Monitoring
Credit bureaus monitored
Credit scoring model used
Dark web scan
Yes, one-time only
*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.