Woman checking her credit score on a laptop

Your credit score is the key to getting approved for a loan with a lower interest rate. The lower the interest rates on your loans, the more income you’ll have available for other uses, including saving for retirement.

Here are four simple ways to improve your score on the credit scoring system that most financial institutions and mortgage lenders use.

Pay on time

Your payment history makes up about 35 percent of your total credit score. So if you’re never late with your loan and credit card payments, you may be well on your way toward a stronger credit score. If a payment is late, your lender will tack on a late fee and you could end up paying interest on that, as well. Late payments also can lower your credit score.

Reduce your current debt 

The amount you owe to all your lenders makes up about 30 percent of your score. The less outstanding credit you have, especially on credit cards, the better your score. But a history of good debt management is better than having no debt at all. If possible, consider paying additional amounts to reduce the balance. Even making an extra monthly payment of $25 will help to eliminate debt faster.

If your credit is new or you have no credit history, consider applying for a credit card with a low limit. Remember, having no debt can hurt you because lenders have no way to tell if you are responsible with credit. Credit cards are a quick and effective way to build credit. However, if used irresponsibly, a credit card can damage your score. Be sure you never miss a payment and when possible, pay the balance in full every month. Making only the minimum payment due on your balance each month will extend your payments and significantly increase the amount you ultimately pay out.

Stick with your lenders

The length of your credit history accounts for about 15 percent of your score, so it pays to maintain your credit relationships. Canceling unused credit cards to reduce your overall credit may work against you because your score considers both the average age of all your accounts and the age of your oldest account.

Limit applications

The rest of your credit score, 20 percent, rates your debt mix, the number of accounts you have, and whether you have recently applied for a loan or credit card. Limiting the number of applications you fill out should help increase your score.

As a consumer, you’re entitled to a free copy of your credit report once a year from each of the three credit bureaus: Equifax, Experian and TransUnion. Get yours at www.annualcreditreport.com, the only source for free credit reports authorized by federal law. 

The advice provided is for informational purposes only. Contact a financial advisor for additional guidance. 

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