Editor’s Note: This story originally appeared on The Penny Hoarder.
If you want to get your finances in order, here’s a good New Year’s resolution: improve your credit score.
Many New Year’s resolutions fail because they are so extreme. Think about all the weight loss and money saving goals that crop up at the start of every year.
This resolution is different. No extreme measures are necessary. But there are no shortcuts. Building good credit is a goal you should commit to 12 months a year.
How to build good credit in 10 steps
Ready to make 2022 the year you finally prove your credit? Here’s how to build good credit in 10 steps.
1. Stay on top of your credit reports
About 1 in 5 credit reports contain inaccurate information. Be sure to access your reports on AnnualCreditReport.com, rather than one of the many websites that offer “free” credit scores, but will require you to enter your credit card number to sign up for a test. File a dispute with the bureaus if you find anything you think is inaccurate or accounts you don’t recognize.
Your credit reports won’t show you your credit score, but you can use a free credit monitoring service to check your score. (No, checking your own credit doesn’t hurt your score.) Many banks and credit card companies also give you your credit scores for free.
2. Pay your bills – on time – every month
Yes, you knew we were going to say this: Paying your bills on time is the number one thing you can do to build good credit. Your payment history determines 35% of your score, more than any other credit factor.
Set all bills you can pay automatically for at least the minimums to avoid missed payments. You can always pay extra if you can afford it.
A solid payment history takes time to build. If you have made late payments, they will stay on your credit reports for seven years. The good news is that they do the most damage to your score in the first two years. After that, the impact begins to fade.
3. Build credit, even if you’ve made mistakes
You usually need a credit card or loan to establish a credit history. (Sorry, but all those on-time rent and utility payments rarely get reported to the credit bureaus, so they won’t help your score.)
But if you have bad credit or are new to credit, it’s hard to get approved for a credit card or loan. Look for cards specifically marketed to help people start or rebuild their credit. Store credit cards, which only allow you to make purchases at a specific retailer, can also be a good option.
4. Open a secure card if you don’t qualify for a regular card
Opening a secured credit card is one of our favorite ways to build a positive track record when you can’t get approved for a regular credit card or loan. You put down a refundable deposit, and that becomes your line of credit.
After about a year of on-time payment, you will usually qualify for an unsecured line of credit. Just make sure the card issuer you choose reports your payments to the credit bureaus. Look for a card with an annual fee of no more than $35. Some secure card options we like (and no, we’re not paid to say that):
- Discover it safely
- OpenSky Secure Visa Card
- Capital One Secure Mastercard
5. Ask for a limit increase; Act like you never figured it out
Increasing your credit limits improves your score because it decreases your credit utilization rate. It is credit score language for the percentage of credit you are using. The standard recommendation is to keep this number below 30%, but in reality the closer to zero the better.
If you have open credit, ask your current creditors for an increase, rather than applying for new credit. This way, you’ll avoid reducing the term of your credit, which could hurt your score.
The downside of a higher credit limit: You’ll have more money to spend that isn’t really yours. To get the biggest credit score boost from a limit increase and avoid paying more interest, make sure you don’t increase your balance.
6. Prioritize credit card debt over loans
Tackling credit card debt helps your credit score a lot more than paying off other debts, like a student loan or mortgage. The reason? Your credit utilization rate is determined exclusively by your lines of credit.
Bonus: Paying off credit card debt first will usually save you money, as credit cards tend to have higher interest rates than other types of debt.
7. Keep your old accounts active
Provided you don’t pay ridiculous fees, keep your credit card accounts open once you’ve paid off the balance. Credit scoring methods reward you for having a long credit history.
Make a purchase at least once every three months on the account, as credit card companies often close dormant accounts. Then pay it in full.
8. Apply for new credit selectively
When you apply for credit, this translates into a thorough investigation, which usually lowers your score by a few points. So avoid frequently applying for new credit cards, as this can signal financial distress.
But if you’re looking for a mortgage or a loan, don’t worry about multiple applications. As long as you limit your purchases to a 45-day window, the credit bureaus will treat them as one request, so the impact on your score will be minimal.
9. Still overwhelmed? A debt consolidation loan could help you
If you’re struggling with credit card debt, consolidating your credit card debt with a loan might be a good option. In a nutshell, you take out a loan to clear your credit card balances.
You’ll benefit from the simplicity of a one-time payment and you’ll generally pay less interest, as interest rates on loans tend to be lower. (If you can’t get a loan that lowers your interest rate, that’s probably not a good option.)
By using a loan to pay off your credit cards, you will also free up credit and reduce your credit utilization rate.
Many debt consolidation loans require a credit score of around 620. If your score falls below this threshold, work on improving your score for a few months before applying.
10. Keep your credit score in perspective
All of the credit monitoring tools available allow you to obsess over your credit score. While establishing good credit is important, look at the big picture. A few final thoughts:
Your credit score is not a report on the state of your finances. It simply measures how much of a borrower you are. Having an emergency fund, saving for retirement, and earning a decent living are all important for your finances, but they’re all things that don’t affect your credit score.
Lenders look at more than your credit score. Having a low debt-to-equity ratio, a decent down payment, and a regular salary increases your chances of being approved when you make a big purchase, even if your credit score is poor.
Don’t focus on your score if you can’t afford the necessities. If you’re having trouble and have to choose between paying your credit card or paying your rent, keeping food on the table or getting medical attention, paying your credit card is always the lowest priority. Of course, talk to your creditors if you can’t afford to pay them, as they may have options.
Focus on your overall financial situation and you’ll likely see your credit score improve as well. Remember, though, that while credit scores matter, you matter more.
Now go crush those goals in 2022 and beyond.
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