Does Personal Net Worth Affect Credit?
Personal net worth is your total assets minus your total liabilities. Assets can include home equity, investments, retirement accounts, jewelry and cash. Liabilities can include your mortgage, loans, bills and other debts that you owe. Like your net worth, your credit plays an important role in your life. It may determine if you qualify for a home loan and at what interest rate, and it may even determine which job offers you receive. It's beneficial to understand what affects your credit and how your credit is affected by your personal net worth.
Your credit report contains data about your credit accounts, such as the name of your creditors, payment history, balances owed and credit limits. It also contains personal information about you. This includes your current and former addresses, date of birth and Social Security number. It may also include the name of your employer, collection accounts and public records, such as tax liens, judgments and bankruptcies. What it doesn't include, however, is any information about your salary, checking and savings account balances, retirement accounts, investments (stocks, mutual funds and bonds) or the value of your personal net worth.
Since your credit report contains neither salary nor personal net worth value, such information does not affect your credit. It also does not affect your credit score. Your credit score is determined by the information found in your credit report. FICO credit scores have a numerical range from 300 to 850. The scores measure your debts, payment history, types of credit accounts you have, new credit inquiries and the overall length of your credit history.
Although your personal net worth does not affect your credit or credit score directly, your net worth may indirectly impact your credit. The Credit Card Accountability Responsibility and Disclosure Act of 2009 requires credit card issuers to obtain income information from you when you apply for a credit card. This was done to help ensure that consumers have the ability to repay the debt. Credit card lenders ask you to disclose your salary and other sources of income. Whether you're approved or not is generally based on your credit score and credit report, but the lender may take into account your income information when determining how large of a credit limit you qualify for.
Of course, even if you have high credit limits, maxing out your credit cards with debt will negatively affect your credit. A maxed-out credit card can lower your credit score anywhere from 10 to 45 points, according to FICO. According to Liz Weston of MSN Money, it's recommended that consumers keep balances on a credit card at 30 percent or less to achieve a high score, with less than 10 percent being ideal. To maintain a good score, FICO recommends that you make all of your payments on time. One 30-day-late payment can drop your credit score by as much as 110 points.
Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.