What's Your Scoreboard

When people discuss financial matters (which is rare enough between two individuals), we tend to discuss credit scores. There are commercials about it. There are countless products and services out there (many of them scams) to help you increase your credit score. A person’s credit score has become the de facto method of measuring their financial success. At least, it is for those of us who are not rich.

But should it be? I remember a particularly difficult year for our basketball team in high school. Our star player had torn his ACL in summer ball and was out for the entire season. Our offensive plan for that year was to out-hustle other teams, to move the ball around a lot and quickly until good shot opportunities presented themselves. To drive this home in practice, our coach would require us to count how many passes we made. We were not allowed to take a shot until a minimum number of passes had been made. (In fact, I think we did this in a couple games, too). We became extremely focused on “number of passes.” What if we started to use number of passes as our scoreboard? We could make hundreds of passes in a game. But we could (and did) still lose the game. That’s because number of passes isn’t how the winner of a basketball game is determined. The team with the most points at the end of the game wins.

Bringing the analogy back to finances, what scoreboard are you using? When you think about your financial situation, what criteria are you using to determine how good or poor it is? For many people in the United States today, credit score is one of the most important factors in determining how successful they are financially. It’s a number, which makes it easy to relate to other people, and it is basically determined the same for all people which makes it a good comparison. But the critical question that needs to be asked is this: Does a high credit score mean you are financially successful?

For that matter, what does financial success mean? There is no easy consensus on this one because the mark of “financially successful” is different for different people. For some, they count themselves financially successful if they can pay their bills on time. For others, it is the ability to buy non-essentials for their family (things they simply want, not need). For some, being a “millionaire” (or having lots of money) is the mark. The interesting thing about all three of these examples is that none of them really depend on debt (or credit). Sure, you could buy your family stuff with a credit card or a loan, but if you have tons of credit card debt, would you really consider yourself “financially successful?”

Let’s take the example of people we would all consider to be financially successful: Millionaires and Billionaires. When we talk about them, we do not talk about their credit score. What metric do we use? Net Worth. In fact, Net Worth is really the determining factor in whether you are a millionaire or billionaire. What is Net Worth? It is the sum of the value of everything you own minus what you owe. Quick example: You have a house that is worth $300,000 but you still have a mortgage on it for $150,000. If that was all you owned that was valuable, and you had no other loans or debts, your Net Worth would be $150,000 (300,000 – 150,000 = 150,000).

Now, what I find interesting is that we use Net Worth to compare millionaires and billionaires; we use Net Worth to define what a millionaire or billionaire is; but we use something completely different to measure the “financial success” of “normal” people. Why? Having a good credit score requires that you interact with debt. You must have a credit card or take out loans or engage with debt in some other way in order to have a credit score. Who benefits from you using your credit card or taking out loans? The companies that issue the cards or loans. Credit score as the measure of financial success keeps the credit card companies and banks rich because people keep borrowing money. And the illusion has been remarkably successful. After all, none of us go around talking about our Net Worth.

Flip the whole problem on its head. What would happen if you made Net Worth your scoreboard instead of credit score? In the example we used, buying a bigger house will not help your Net Worth if your mortgage increases by the same amount (say a $400,000 home, but now you have a $250,000 mortgage). Paying down your mortgage, though, would. If you continue to pay your mortgage down, when you only owe $100,000 on that $300,000 home, you now have a Net Worth of $200,000. Having Net Worth as your scoreboard for financial success encourages you to own (actually own, not have a loan for) things of value. A paid-for home, money in a retirement or other investment account, a profitable business, paid-for rental properties. All of these would contribute to your Net Worth. Of course, any debt you have against them will detract from your Net Worth, which encourages you to pay off the debt.

Having your credit score as your scoreboard encourages you to stay in debt. Variety of debt is one of the factors that affects your credit score. If you only have a mortgage, you will lose points for having a limited debt diversity. Add a credit card and a car loan, and you will increase your score due to increased variety (assuming you make your payments on time).

Photo by Damir Spanic on Unsplash

Which do you want to be your scoreboard? One puts money in your pocket. The other puts money in the pockets of credit card companies and bankers. Ultimately, we use Net Worth when we talk about millionaires and billionaires, people we can all agree are financially successful. Why wouldn’t I use the same scoreboard? If I focus (financially) on Net Worth, one day I, too, can join the ranks of the millionaires.