2020 was a tough year in so many ways. If you’re starting 2021 with a less than stellar credit score, have faith: you can turn it around. The steps you take today to improve your credit can have a long-lasting effect on your financial options in the future. Having good credit will help you achieve so many of your other financial goals, like buying a home, a new car, or taking out a loan to start a new business.
Creditors review your credit history before approving you for a new loan to see whether they think you’ll be able to repay any money they lend you. A strong credit score—with a history of on-time payments and low debt balances—will help give them assurance you’ll likely be able to pay back what they lend to you.
If your credit score isn’t where you want it to be, get started with these steps to get your credit health on the road to recovery this year.
Get your credit report
The first step to making an improvement this year is to get a copy of your credit report. You can request one for free at annualcreditreport.com. While it might not be the most interesting read, this is the information that creditors use to decide whether to lend you money (and it’s the information that’s used to calculate your credit score).
Your credit report has your current debt information and payment history. If you’ve missed payments or opened up a new credit account, this will show up on your credit report.
When you review your credit report, it’s really important to look for any errors. That might look like creditors reporting missed payments (when you know you didn’t miss any) or debt amounts listed that don’t actually belong to you. If you do find errors, be sure to take the time to dispute them correctly.
Set up auto-payments
While credit reporting agencies don’t share the exact formula they use for calculating your credit score, they do share some of the top things that influence your score. One of the biggest? Your payment history.
Missed payments and delinquent accounts can have a big impact on your credit score. The good news is that with time, you can reverse any damage done to your credit by making on-time payments.
If you have a habit of missing due dates or you just want that extra security that you know you won’t miss another payment, set up automatic payments. Make sure that your credit card is paid every month, automatically. Even if you’re just making the minimum payment with the automatic payment each month, you’re still building a history of on-time payments and saving yourself money in late fees.
Contact creditors
If you are having trouble meeting your financial obligations right now, you’re not alone. This is a tough financial time for a lot of people, and some creditors are offering relief to borrowers.
Rather than missing payments and hoping you’ll be able to make your payment next month—which can cost a lot in interest and fees—call your creditors and tell them about your situation. Most credit card companies have a program in place to help borrowers who have lost income due to COVID-19.
Your credit card company might offer to lower or defer your monthly payment, decrease your interest rate, or waive fees. If they offer you help, make sure to get a written copy of the agreement.
Create a payment plan
Lowering your debt balances is one way to improve your credit. If you’re carrying a lot of debt, especially high-interest credit card debt, make a plan to pay down your balance.
Create a plan that is realistic and something that you can stick to. Creating a monthly budget and tracking your spending will help you see if there are places you can cut back to put more money toward your debt payments.
Take a break from applying for new credit
Another thing that can ding your credit is applying for new credit. When you apply for a new loan or a new credit card, the lender performs a credit inquiry. That means they pull your credit history to see if you have a history of repaying your debt.
When you have a lot of credit inquiries in a short period of time, it can signal to lenders that you might be in financial trouble.
Get credit counseling
Sometimes we just need a little help to get ourselves back on track. A certified credit counselor can help you navigate creating a repayment plan and working with creditors to improve your credit situation.
Look for a credit counselor that is trained in consumer credit and who will help you develop an individualized plan. Before signing up with a credit counseling agency, check that they don’t have any complaints filed with a consumer protection agency or with your state Attorney General. You’ll also want to interview any agency that you may work with to understand their fees, whether they are licensed, and the full scope of the work they will perform.
The Federal Trade Commission has a great list of questions you should ask a credit counseling agency before working with them.
If you’re not starting 2021 out with healthy credit, give yourself some grace. 2020 was a tough year for everyone. Building healthy credit takes time and perseverance, but hopefully, with some intentional effort and a little help, your credit score will look a little different by the end of the year.
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