Credit Score: How to Use Yours to Save Money

10 min readJun 16, 2019

I recently received the following question from a reader: “I’m in my 20’s and I’ve been shying away from getting store cards (although now I think that might have not have been a good idea). The reason I believe this was a mistake is that I am a recent graduate and I realize that I need good credit for my financial future. So, my question is: what is your advice around building good credit and getting a good credit score?

A credit score seems to be one of these metrics that are infamously mysterious. What is it? How is it determined? Why is it important? Who even looks at it? And how do you improve it?

Well, let’s clear some of the mist surrounding your credit score and get you on track to saving money through it.

What Exactly Does Your Credit Score Mean?

So, before we get started, what exactly is your credit score?

Well, quite simply, it’s a metric that credit providers (think banks or loan providers) use to assess whether you’re responsible when taking on debt. In other words, are you drowning in and relying on your credit card to survive each month (bad) or are you consistently paying off what you’ve borrowed (good)? Essentially, are you good at managing credit?

Each credit bureau calculates its score differently and usually on different scales. But there are a few core factors that are shared among them that can affect your score. These include:

Payment history (are you paying, at the very least, the minimum balance on time?)
The number and variety of credit accounts in your name (ironically, the more the better)
The actual amounts that you currently owe (i.e. your debt — not surprisingly, the more debt you have the bigger negative impact on your score)
How many credit applications have you recently made? (i.e. too many in a short time-frame screams desperation and lack of credit responsibility)
How long have you owned credit? (if you can prove that you’ve owned credit responsibly for a long period, the better)

Of the 5 different factors that affect your credit score, your payment history is probably the most important. This tells credit lenders whether you’re good at actually managing credit. This factor alone can make up between 35–40% of your score!

While the remaining factors contribute significantly less towards your overall score, they’re still areas that you’re able to tweak in order to improve your credit standing in the long-run.

Why is Your Credit Score Important?

Okay, so now that we know what a credit score is, the next question is: why is it important?

Well, as I mentioned before, credit providers use your credit score to determine how responsible you are when they lend you money. Will you pay back your financial obligations on time? Or will you default on every payment? Can they rest assured that you’ll pay back the money they’ve loaned you?

Essentially, your score provides a metric for risk. The companies to which you apply for a loan or for a credit card want to know that they can trust your intentions. Your credit score is a number they can use to assess that.

If you’re responsible with credit and have a high credit score, they’re likely to want you as a customer. And, as a result, they’ll give you a pretty sweet deal on your interest rate — whether on a credit card or for a mortgage. Why? Because they’re pretty certain you’ll pay them back based on your payment history. And this can save you boat loads of money in the long-run.

However, if you’ve racked up a bunch of unpaid bills over time or declared bankruptcy, they’re going to be a little more skeptical. And, in an effort to protect themselves, they might offer you credit, but at a much higher interest rate. In the case that you default, they have at least covered themselves to some degree.

Related: Derailing Your Debt in 2019

Don’t Put Your Credit Score on a Pedestal

I get it — we all like to prove to ourselves and others that we’re somewhat good at managing our money. What this often means is that we try everything in our power to get the highest credit score possible. It’s the pinnacle of financial fitness.

In an effort to reach this summit, we are encouraged to open 10 credit card accounts, apply for a few store cards and maybe take on a loan. Needless to say, our misunderstanding of how credit scores work often leads us down a path that is detrimental to our overall credit profile.

I think it’s about time that we take our credit score off the pedestal that we’ve put it on. It’s not the be-all, end-all of money management. It’s simply one metric. There are countless other ways to show you’re responsible with money: a high savings rate, a low amount of overall debt, your net worth or financial freedom number.

Don’t put all of your financial energy into trying to improve a single metric. Work at them all equally and you’ll find that your financial future will be secure and stable in the long-term.

Store Cards Are Not the Way to Go

As my reader’s question shows, we have been brain-washed by companies to believe that store cards are an important and effective way to improve your credit score. But I believe this to be a simple marketing ploy that only benefits them. Why do I say that?

1 // Store cards have limited usability

If you’re responsible with one, a store card can certainly improve your credit score. But these cards have limited usability. You’re usually restricted to using them at a single store (or chain of stores). You’re possibly better off using a credit card that can offer cash-back or loyalty program rewards.

Also, in an attempt to improve your score, you might be persuaded to purchase items you don’t need on credit. And, to tempt you further, stores often offer discounts when using their branded card for in-store purchases. If left unchecked, store card debt can easily spiral out of control. It’s best not to put yourself in this situation in the first place.

2 // Store cards often have much higher interest rates and lower protections

While companies may tout all the discounts and rewards you’d get for applying for their store card, they don’t tell you about the fine-print.

If you took a magnifying glass to this fine-print, you might be shocked to learn that store cards offer some of the most ludicrous interest rates. In fact, in 2016, South African store cards were charging an average of 23,75% in interest, almost 9% higher than the average for most credit cards.

In addition to this, most store cards don’t come with the protections and security offered by most credit cards, including travel insurance, purchase insurance and lost card protection against fraud.

3 // Store cards can dent your credit score

For a card that has limited usability, high interest rates and reduced protections, is it worth it to dent your credit score in applying for one? Because when you submit that application, it counts as a hard inquiry against your credit score. Furthermore, due to the fact that it is a new card within your credit arsenal, it will also reduce your “credit age” (the average age of all your lines of credit).

Both of these will have a negative impact on your credit score. You decide — is it worth it in the end?

What About Credit Cards?

Okay, so maybe store cards aren’t all they’ve been cracked up to be. What about credit cards?

Well, if used wisely and responsibly, a credit card is probably one of the easiest ways to improve your score. The reason for this is that a credit card can be used almost anywhere — to cover all your typical monthly expenses.

If you use it in the same way as you would your debit or checking account, but you pay back the full balance each month, you’re well on your way to earning an excellent credit score. All of this without having to pay a cent in interest.

In addition to this, most credit cards provided through banks will offer some form of loyalty or a cash-back rewards program. This means that you can actually make money by spending money. Of course, that’s no reason to let loose and go wild. But it can be a way to save a little extra money each month.

What if you don’t have a credit history?

But what if you’ve never had a line of credit before? With no credit history, will the bank still trust you enough to give you a credit card? Well, the answer is: maybe.

When I was living in the US, it was almost impossible for me to apply for a line of credit online, since I had no credit history specific for that country.

However, I got around this by visiting the bank in-person. I explained my case and spoke with VISA representatives on the phone and they offered me a line of credit for $500. It was small, but it was a start.

Eventually, throughout my 5-year stay, I increased my credit limit from $500 to $28,000. And my credit score went from a low of 629 to its current value of 796 (Transunion) or 801 (Experian).

Sometimes it helps to visit the bank in-person to plead your case and show that you’re financially stable enough to take on a line of credit.

Alternatively, ask the bank if they offer student credit cards (with much lower limits), you can become an authorized user on your parent’s card or alternatively explore whether your bank offers secured credit cards.

Other Ways to Improve Your Credit Score

As I mentioned earlier, your payment history counts the most towards calculating your credit score. However, there is room to improve your score by paying attention to those other factors:

Always ensure that your balance is less than 10% of your total credit limit — preferably you should be paying off the full balance each month in the case of a credit card.
Don’t apply for multiple lines of credit at the same time (or within a short time frame). These will all count as hard inquiries, negatively hitting your credit score. Spread out your credit applications (if need be) over a period of months, or even years.
It took me 5 years to increase my US credit score from the low 600s to the low 800s. Realize that improving your credit score takes time. By simply being responsible and waiting, your credit age will increase and improve your score over time.
Also, did you know that your phone contract counts as a line of credit? Who would have thought that that pesky contract could benefit you in some way?

How Does a Good Credit Score Save You Money?

Having a good credit score can save you a significant amount of money if you have no option but to rely on credit for certain purchases — think your house, car and education. How so? I’ll let this infographic speak for itself:

Free and Paid Ways to Check Your Credit Score

So now that you know all this information, how do you even check your credit score? Well, there are several free and paid ways. These include:

TransUnion: Free for South Africans once per year. Thereafter, it’s R80.70 per credit report in the same year. There are also yearly subscription offers. Check your local TransUnion website for more details.

Experian: Accessed through Credit Expert in South Africa, with the first report being free. Check your local Experian website for more details.

Clear Score: Always free for South Africans, with a pretty neat user interface. The credit score reported on this platform is sourced from Experian.

Credit Karma or Credit Sesame: Free for US citizens (or US aliens with a social security number)

Final Thoughts

While your credit score can be an important metric in navigating your financial future, it’s certainly not the only one that deserves attention. Only in situations when you know that you’ll need to take on credit in the future (such as purchasing a home) will you be required to pay closer attention to your score.

In the meantime, focus on cultivating good financial habits, such as budgeting, increasing your savings rate and upping your net worth. To get you started, download our free Financial Starter Pack and Budget Breakdown Workbook.

If you have any stories, strategies or wisdom you’d like to share about your experiences with credit scores, please feel free to get in touch with me.

Originally published at https://thesavingscientist.com on June 16, 2019.