Credit score got you down?

The importance of your credit score

These days, it seems like you need your credit score for just about everything, whether it’s a mortgage or a car loan, or even a seemingly unrelated purchase, like utility service or a new cell phone plan. But this magic three-digit number doesn’t just affect your ability to get these loans or services – it also impacts how much you pay for them. If your score is low, you’ll pay more in interest rates and fees than someone with a higher score.

Three easy steps to a higher credit score

Even if you’ve made mistakes in the past, you can start improving your credit score today by taking these three easy steps.

1. Make your payments on time. As much as 35% of your credit score is determined by your history of past payments, so it’s the first thing you should look at if you need to improve your score. Fortunately, this is an easy problem to correct. Most lenders offer automatic payment programs that will simply deduct an amount you specify – either the minimum payment or a larger amount – on the credit’s payment due date. These programs can be extremely helpful if you find yourself missing your payment deadlines consistently, as they take all the work out of the equation for you.

In addition, paying on time has another exciting advantage – saving you money. Although late payments aren’t typically noted on your credit report unless they’re 30 days or more late, your lenders may increase your interest rates substantially if you’re even one day late. Enrolling in an automatic payment program will help keep your interest rates in check, meaning that you’ll save money over the life of the debt.
2. Pay down your account balances.  Another major factor in determining your credit score is what’s known as your credit utilization rate – basically, the balances you carry versus the credit lines you’ve been extended. For example, if you have one credit card with a $10,000 line of credit and you carry a $2,000 balance on it, you have a utilization rate of 20%.

This rate – which accounts for roughly 30% of your credit score – shows lenders how much you’ve extended yourself. A high utilization rate, for example, tells lenders that you may not be able to cover all of your monthly payment obligations should your income change unexpectedly, making them more reticent to offer you additional credit. For this reason, most financial gurus recommend maintaining a utilization rate of no more than 35%. If your rate is higher than this, do your best to pay down your balances until your rate reaches 35% or less and you’ll see a dramatic change in your credit score.

3. Maintain a balanced debt portfolio. When investing, you don’t want to put all of your eggs in one basket, and the same is true for your debt portfolio. Factors like the length of your credit history and the types of credit you’ve been extended also have an impact on your overall credit score. Lenders like to see that you’ve successfully managed your debt for a long period of time and that you’ve managed to balance several different kinds of debt – such as mortgages, auto loans, student loans and credit cards.

To score points in this area, keep your accounts open as long as possible, even if you’ve paid them off entirely. Closing your older accounts will shorten the length of your credit history, bringing down your score by a few points. In addition, it’s a good idea to maintain a few different types of credit (depending on your situation), as well as credit cards from more than one major lender (such as Visa, Mastercard or Discover) to demonstrate to potential lenders that you’re capable of managing several different kinds of debt.

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