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CREDIT SCORE BASICS

August 25, 2020 — first published april 16, 2020

Are you looking for more ways to travel? Maybe you’re trying to save more in general and travel is just part of your future goals.

In order to save more for travel, it’s critical to make the most of your income and learn how to stretch your hard-earned dollars.

One key aspect of this is learning how to understand and improve your credit score.

What exactly is a credit score and where do they come from?

Think about it like this, your credit score is simply a number that reflects how much risk you represent. The lower your credit score, the greater risk you represent to lenders in regards to paying back a loan and making on time payments. Lenders “pull” your credit report from one of the three major credit-reporting agencies: TransUnion, Equifax, and Experian.

How can I get a copy?

You are always entitled to get a copy of your credit report any time you apply for a loan or believe you are a victim of identity theft. In addition, everyone can now get a copy of their credit report from each of the three main bureaus once per year. There are various ways to request a copy of your report, but we recommend going to www.annualcreditreport.com. The report(s) will not include your actual score, but there are various ways of getting that for free too including many banks, credit unions, and credit card companies.

Does my credit score really matter if I don’t need a loan?

It is important to note that credit scores aren’t used solely for loan applications. Your credit score is also used by other businesses like cell phone and utility companies to determine if you need to pay a security deposit. Insurance companies may also determine the cost of your premiums based on your credit score. Even if you don’t plan on taking out a loan anytime soon, your credit score could still be hurting your finances.

Almost everyone knows that having a bad credit score could be costing them serious dollars, but until you look at specific examples it’s hard to really gauge how much. Let’s take a quick look at the example below where two people are buying the exact same car and paying over the same period of time.

The difference wouldn’t be as great if you were buying a cheaper car or paying over a shorter period of time. However, things get even worse for people with poor credit when you look at other examples like mortgages or student loans where you have larger balances and you’re paying over a longer period of time.

What affects my credit score?

There are various factors that affect your credit score, and some have a bigger impact than others. It’s often quoted that “The best predictor of future behavior is past behavior,” and this is very true when it comes to your credit score. How you've repaid previous loans has the biggest overall impact on your current credit score. How long you’ve had credit, the variety of loan types you’ve had, and your current credit usage also impacts your score.

How do I improve my credit score?

Just like dieting, there isn’t a magic pill that can fix your trouble spots overnight. Improving your credit score requires hard work and diligence. One of the best things you can do is to setup any loans with auto-pay to ensure you never miss a payment or get charged a late fee. Carefully look over your credit report for mistakes or charged-off accounts you may not be aware of and get those fixed. Finally, attempt to keep your credit balances at no more than 30% of your available limits. By following these simple steps, you can improve your score and start saving money for the important things in life… like travel and adventures!

Vincent Neal, co-founder of Travels and Curiosities, has been teaching financial literacy out in the community for over 10 years with roles in credit unions across the United States. His experience working within the credit union movement has taught him to become a fiercely dedicated saver without sacrificing day-to-day happiness and living life to the fullest.

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