Step #2: Pay your bills on time

There are plenty of things that separate good credit from bad, but the most important is your payment history - that is, whether or not you pay your bills when they are due. Loans, credit cards, utilities ... they all count.

If you have a tendency to postpone payments on certain bills in order to pay others, nip that ugly habit in the bud starting NOW. If it's all you can afford, make at least the minimum payments - preferably more to reduce your interest charges. If you have trouble remembering to pay your bills on time, consider having them automatically deducted from your bank account.

This single step will immediately begin improving your history by putting positive credit information in front of the negative information, which will increase your credit score month after month.

Next: Step #3: Use and maintain your credit cards wisely