Credit score tips to use in the new year

A good credit score has many benefits, such as opening doors to better borrowing terms and lower interest rates. A bad or less-than-ideal credit score can be frustrating, leaving you wondering what to do next.

Just because you have a bad credit score now does not mean you must be stuck with it forever. While you can't increase your score overnight, there are habits you can adopt that will make a difference.

There are four simple ways to improve your score, including reviewing your credit report, paying down your debts, setting up automatic payments and ensuring you don't over extend your credit. We will break down these tips so you can focus on those goals this year.

What you’ll learn:

• Review your credit report
• Pay down your debts
• Set up automatic payments or reminders
• Don't over-extend your credit

Review your credit report

Before you look at your report, you may be wondering what factors go into a credit score? Your FICO credit score is made up of the following key factors:

• Your payment history (35%)
• Credit utilization (30%)
• Age of credit (15%)
• Credit types/total accounts (10%)
• Credit inquiries (10%)

Once per year, you're entitled to a free copy of your credit report. If you haven't gotten yours yet, there is no better time than the present at annualcreditreport.com. Your credit report contains your credit history from the past seven years that affects your credit score. Review it for any inaccuracies and make a note if anything is hurting your credit score — such as late payments and having too much debt.

What should you do if you find an issue with your FICO credit score? If you find any problems with your report, the Federal Trade Commission (FTC) recommends contacting the credit bureau and the creditor. Provide them with copies — not the originals — of any documents supporting your position, and keep copies of the letters and other documents for yourself, too.

Pay down your debts

Having a lot of debt impacts your debt ratio, and the interest you pay could be going toward other things you value. Rather than making just the minimum monthly payments, resolve to start the New Year on the right financial foot by paying off your credit cards and other high-interest debts as quickly as possible. When you make a plan, remember these important notes:

• Paying off one card with another won't help your credit utilization ratio.
• Avoid closing out lines of credit in an effort to boost your credit score — doing so may actually have the opposite effect.
• Create a six-month plan to cut expenses so you can put more money toward paying your debt.

Set up automatic payments or reminders

Smartphones can remind you of just about anything. Why not leverage this technology to alert you when each bill is due? If you miss a payment, contact your creditor immediately. They may be willing to remove a rare late payment from your account.

If you haven't done so already, automate recurring payments that are always the same amount, like your car payment and mortgage. You can also automate variable withdrawals, such as credit card payments, but be sure to change your account setting to withdraw the statement balance on the card rather than just the minimum payment.

Don't over-extend your credit

If you don't have a credit history, getting a credit card can be a good way of establishing a track record. However, avoid applying for too much credit. Having too many hard inquiries by creditors on your credit report can raise a red flag for other creditors down the road. It's important to know when your credit score is pulled. If you need to apply for a loan and want to shop around, do it within a short time frame rather than spreading out your applications over several weeks or months.

As the phrase goes, "new year, new you!" Follow these and other steps to raise your credit score this year to get to a more financially fit you.