Unbelievably, a lot of people are unaware of how their credit card debt affects their financial situation. Many people confuse their net worth with their credit eligibility because they are unsure of how their net worth is determined. In actuality, though, your personal net worth and credit worthiness are two entirely different—yet equally significant—aspects of your financial health. Someone does not necessarily have a large net worth just because they have a lot of credit cards. The truth is that a person’s personal net worth might potentially suffer depending on how they handle their credit products.
How Are You Calculating Your Net Worth?
The total amount of your assets is subtracted from all of your liabilities to determine your personal net worth. Your debt obligations, including those from credit cards, lines of credit, student loans, mortgages, and overdraft protection, are included in your liabilities. Personal savings, investments, retirement accounts, employee stock purchase programs, and bank account balances are all examples of assets. The worth of your house, a gallery, jewelry collection, car, furniture, and precious metals are also assets (i.e. gold and silver bars).
Since credit cards are obligations rather than assets, they do not improve your net worth. Because the entire credit limit is available for use at any time, whether you use your credit card occasionally or pay the debt in full each month, it is still seen as a financial burden. Even if you took on the debt to buy an item, liabilities reduce the value of your net worth.
In order to buy an item like a home or a car, consumers frequently ask for a personal loan or line of credit. Your personal net worth will reflect the liabilities because the loan’s amount will be extremely near to the asset’s early-year value. However, as the debt is repaid and the asset’s value rises, your own personal net worth will as well. Unless the loan is fully repaid and the asset still has some value, having a depreciating asset like a car is unlikely to have a beneficial influence on your net worth.
How much money do you personally have?
Try to determine your net worth right now. In one column, add up the worth of all of your assets, both liquid and intangible (fixed assets). Then, in a separate column, total up all of your liabilities, such as loans, credit card debt, house loan balances, overdraft insurance, and so forth. The total worth of your assets is now subtracted from the amount of your liabilities. What is the overall value of your private assets?