If your 2011 financial history involved a string of late payments, dealing with foreclosure, or having accounts go to collections, your credit score probably took a beating.
Still, it is possible to restore your credit if you're willing to make a consistent effort. You'll need to modify your spending, adopt healthier payment practices and tweak a few money-management habits so you don't set yourself up for more financial problems in the coming year.
Even if you've had the granddaddy of all credit problems, a bankruptcy, "there are many ways people can rebuild their credit at various points during and after a bankruptcy filing," says Chris Bridges, head of Vision Credit Services.
Here are twelve steps to credit recovery in 2012:
1. Pay down your credit cards
Even though paying down loans like a student loan or a car loan can help improve your financial situation, paying down high credit card balances will have the greatest impact on your credit score. Give your credit score a boost by keeping your credit card charges at no more than 30 percent of your available credit limits. If you open a new line of credit, try to keep that usage down below 10 percent.
2. Use cash more often
It's not necessary to cut up your credit cards to have a good credit rating. After all, credit cards aren't inherently bad. The problem comes when we over-use them. So if you're deep in debt, your credit card bills are likely suppressing your credit score. Put a spending freeze on your credit cards so you can give yourself some breathing room to pay down the balances quickly. Instead of racking up more debt, figure out ways to use cash more often.
One reason Americans tend to use credit cards too often, says financial adviser Leslie Greenman, is because "we can just whip out our credit card without taking an immediate hit in our bank account. But that has to stop," she says.
"Now is the time to gain a clear understanding of the family financials," Greenman advises. "When you do so, you'll be more inclined to control your spending."
3. Make small charges
While you shouldn't be adding more to the balance of your cards, it's still a good idea to charge very small purchases each month and then pay them off immediately. Keeping older credit cards may help to improve your credit score by demonstrating that you can responsibly pay your bills on time each month.
Another benefit of using the cards, even for minimal purchases, is that it reduces the risk that a bank will close your credit account, something that can hurt your credit score.
4. Check your credit reports
Make sure your credit reports are free of any errors or major mistakes that could be affecting your credit score. Get a free credit report three times a year from www.annualcreditreport.com. Dispute any mistakes and provide documentation to the credit bureaus so they can fix inaccurate or outdated information promptly.
You will first need to review your credit files, of course, to be able to spot any blunders. Unfortunately, in a recent Zogby IBOPE survey commissioned by TransUnion, more than half (56 percent) of Americans surveyed said they had not checked their credit report at all in 2011.
5. Request "goodwill" adjustments
If you missed just one payment on a credit card, an auto loan or even a mortgage, contact the creditor or lender and ask for a "goodwill adjustment" to get the incident off your credit report. Some creditors and lenders are willing to take a single mistake off your record, according to Bridges.
6. Get a handle on student loans
If you've missed payments on a student loan, make an effort to bring it current. Ignoring your college debt or letting it languish in default will only continue to hurt your credit rating.
The first step in remedying the problem is to take a comprehensive look at all your federal student loans via www.nslds.ed.gov. This is the website for the National Student Loan Data System.
The NSLDS database gives you detailed information about your student loans, such as the loan status (in deferment, default, repayment, etc.), loan amount, date, the amount cancelled (if any), as well as the outstanding principal and interest you owe. To access the NSLDS, you must first obtain a four-digit PIN here from the Department of Education.
After you review your loans, call your lender to discuss repayment options and consider enrolling in a student loan rehabilitation program to get your account back on track.
7. Make sure bills are paid on time
Set up a bill payment calendar so that all of your bills are paid on time. Remember that missed payments or late payments will result in fees and are usually reported to the credit bureaus. Make paying bills on time a top priority in 2012. Many financial institutions and some utilities can offer you email reminders about your spending and payment due dates. Paying your bills online will save you time and postage each month.
8. Don't close old credit card accounts
Even when you've paid off a particular credit card and you've permanently stopped using it, think twice before you close the account. It's OK to cut up the card, but closing the account could actually hurt your credit score by reducing the amount of available credit you have.
9. Use the right credit cards
If you honestly can't live without your credit cards at the moment, at least be more mindful about how much you are charging and make sure you're using the right credit cards. Try to avoid maxing out cards that are already carrying a high balance, and if you have a rewards credit card, consider running regular expenses through it to get perks like cash back or miles.
10. Apply for a secured credit card
If your credit score is shot, a secured credit card is one of the best tools for rebuilding and repairing your credit. You'll need to pay a deposit to use these cards, and the amount you deposit becomes the balance on your card. Maintain a low balance and keep this secured card active to improve your credit history.
11. Shop lenders in a two-week time frame
If you're in a position to apply for a loan, make sure you are submitting applications within a two-week period (or less). Too many inquiries over a few weeks or months can have a negative impact on your credit score. Submitting multiple applications within a two-week period, however, won't hurt you as much, as such applications for a home or car will be considered as a single inquiry.
12. Avoid unnecessary department store or gas cards
Even though it can sometimes be easier to get department store cards and gas cards, they're usually not the best for your credit, and they typically carry very high interest rates. So avoid applying for these, which will also reduce the number of inquiries on your credit reports.
In general, you only want to apply for credit when you truly need it. And when it comes to credit cards, national brand cards - such as those with a Visa or MasterCard logo - are more flexible than retail or department store credit cards.
Editor's Note, Jan. 19, 2012: While a credit utilization of 30 percent is a commonly recommended target for those trying to reduce their debt, the highest FICO scores are generally associated with credit utilizations from 1 to 10 percent.