A high credit score doesn’t automatically mean you’re rolling in riches, just like a low one doesn’t mean your bank account is perpetually on empty.
A wealthy person can have an atrocious credit score, while someone struggling financially could have a better chance at qualifying for loans they want because their credit is excellent. (We’ll explain a little later why that “could” is italicized.)
That’s because credit isn’t a reflection of how much money you have. It demonstrates how good you are (or aren’t) at paying your debt and affects your ability to borrow more in the future.
A (very) quick primer on credit
You borrow credit from a lending institution. It lets you buy anything you want, as long as you pay it back. Your credit score is a number the credit bureaus use to show lenders how likely you are to repay your debt. It’s an important indicator of how you’ve handled debt in the past and helps lenders determine how risky it is (or isn’t) to lend you money. It affects the kinds of loans you’re eligible to borrow, the interest rates on those loans and much more.
That means if you have a habit of repaying balances on your credit cards, auto loans, mortgage, student loans, etc., your credit score will likely increase. If you have a history of missed or late payments, you might have a harder time achieving a good score and may see it drop over time.
Why good credit doesn’t make you wealthy
Let’s say you make $100,000 a year and have three credit cards. Between them, you owe about $25,000 you haven’t repaid for…reasons. Each month, you carry a balance that keeps climbing because the debt lingers and you’re getting hit with the bank’s variable interest rate.
Still, you have enough money to afford a pretty nice lifestyle. You stay on top of your rent, gas and utilities, and you’re able to stow away a nice chunk of change in an interest-earning savings account.
You’re doing well. Except for those credit cards. For…reasons, you aren’t making payments — not even the minimum ones. And while your bank account (and credit card balance) continues to grow, your credit score continues to drop.
Your bank account may be 💯, but lenders could perceive you as a lending risk because of your history of failing to repay your debt. Ultimately, that could have long-term effects on your credit situation and your chances of borrowing more credit down the line.
Can your credit affect your money, and vice versa?
Absolutely. Although different, money and credit share a connection.
Credit is money — albeit, money that lenders, banks and other financial institutions loan you for a certain period of time on the promise you’ll pay it back. But if you don’t have enough money at your disposal to pay them back, your credit will suffer.
Likewise, if you need to borrow money but can’t because your credit’s not in great shape, you may have to tap other funding sources that leave you in a financial bind.
On the other hand, if you have a good credit score, lenders are more likely to approve you for loans with lower rates. That could save you money on your monthly payments, which can result in more money in your pocket. In these situations, however, credit and money have a causal relationship, not a collaborative one.
Why do lenders care about my income then?
How much money you make has a significant bearing on your ability to borrow. Lenders want to know you have the wherewithal to make monthly payments. That helps them determine whether lending you money is worth the risk.
If you apply for a loan that yields a monthly payment that’s much higher than your monthly income, lenders may be unwilling to lend to you. They’ll question whether you truly have the means to repay the debt (which always include interest). Even if you do get approved, getting saddled with debt that unreasonably outpaces your ability to repay it could trap you in a cycle of debt that’s tough to escape.
The moral of the story
Don’t treat your credit score as a barometer of your overall wealth. See it for what it is: an indication of how you manage your money in relation to your debt. While a higher credit score certainly improves your long-term financial health, it does not equate to more dollars in your bank account.