Credit Worthiness vs Net Worth

Investopedia defines credit worthiness as..."an assessment of the likelihood that a borrower will default on their debt obligations. It is based upon factors, such as their history of repayment and their credit score..." click here . On the other hand net worth is defined as the total assets minus total outside liabilities of an individual or a company. Net worth is used when talking about the value of a company or in personal finance for an individual's net economic position. Put another way, net worth is what is owned minus what is owed.

Why then do these two get commonly confused? The root cause can be traced back to our appetite for credit. in most cases we lust after things we cannot afford and  due to  the need to satiate the lust we go and get credit.

When you approach a lending entity they quickly calculate your 'credit worthiness' score which is a way of saying how much you can borrow given your current level of income or additional income. There are other factors that are considered of course,for example your credit history with other credit institutions. This can be hire purchase, previous loans  and debts. When you satisfy the requirement the credit is granted. There are two types of credit: long term and short term. Long term credit finances large scale assets and/or liabilities and one good example is mortgage financing. You get to co-own a property with the bank till the mortgage is paid off whilst incurring additional costs like insurance on top. Short term credit can be short term personal loans and vehicle financing. The latter is a very curious case  as when the value of the vehicle drops, the loan repayment remain constant till you pay off the principal or interest.

Short term credit can be good or bad debt depending on how it is utilized. Most wise people use it to start developing property and only go to the financial institution to finance the remainder. This is called consolidating and if the value of the property exceeds the amount borrowed and within the threshold of the  loan affordability you can borrow more or even purchase a vehicle within the buffer amount.

Now net worth is much more fun. Remember you can accumulate assets in your life time? Yes. The value of investments, property, company shares, insurance holdings cumulatively make up your asset balance or the +ve in your monies. On the other hand all your debts (mortgage balance, credit balances on your financing - car loan etc) make up your liabilities or -ve in your monies. Now adding the two which means bringing the assets and subtracting the liabilities gives you net worth:

Why is net worth more attractive than credit worth?
Well for a number of reason. You have intrinsic value that is not based on a premise of how much you can afford to pay. Your ability to afford to buy or cover debts is solid since the tangible worth of your  accumulations is on the positive and not negative. It can also mean some assets you accumulated were financed by debt and the return is way more than what is paid back (this depends on the cost-return ratio of ROI - Return On Investment).
Credit worth shows how much more you can sink into debt and Net Worth how much you have in assets over and above what you can cover your debt. Do not confuse the two. Strategic tactics need to be implemented to build your net worth using credit worth so as not to accumulate unnecessary debt.
Be wise. 

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