What is the cost of a rotten credit score? The hit on your wallet will extend beyond a double-digit interest rate on an auto loan. Poor credit increases insurance premiums, makes it difficult to rent an apartment, buy a home, sign up for cell phone service and — most ominously — can threaten a service member’s security clearance.
Now the good news. There are steps military families can take to boost their credit scores and new programs on the horizon that help improve your credit file.
Begin by understanding the five categories used to calculate your FICO score:
- Payment history. On-time payments — or lack of timely payments — on credit cards and installment debt such as mortgages and car loans account for 35% of a score. Your credit won’t be dinged until a payment is 31 days late.
- Credit utilization. “Maxing out” your credit cards can affect your score almost as much as not paying your bills on time. Your goal should be to use no more than 30% of your available credit. Using 10% or less provides the biggest boast to your score.
- Credit mix. Your score may be downgraded by up to 10% if credit cards are your only form of credit. However, adding a retail credit card, car loan or mortgage will temporarily lower your score and will be beneficial over time only if you make on-time payments on the new debt.
- Credit history. A track record of using credit successfully makes you less risky to lenders and credit card issuers. As the average age of your accounts rise, your credit score should go up. One trick for “aging” your credit profile quickly is to become an authorized user on a parent or spouse’s credit card, assuming their account has a lengthy and problem-free history.
- New credit. Since a “hard inquiry” is recorded in your credit file each time you apply for credit, opening multiple new accounts at one time can cause your credit score to drop.
People talk about their “credit score,” but in reality, consumers have multiple scores using a 300 to 850 scoring range. FICO and VantageScore 3.0 produce individual scores for all three credit bureaus and proprietary algorithms generate scores for specific purposes such as auto lending, credit card lending, auto insurance, etc.
Don’t expect your VantageScore 3.0, however, to paint a drastically different picture of your credit worthiness than your FICO score, John Ulzheimer, who is nationally-recognized on credit reporting, says.
“If you have pristine credit then it should be entirely irrelevant what brand of credit score (FICO or VantageScore), what credit report is being used, what lender is pulling the information. Every single one of your credit scores says the same thing about you, which is you are a low or no credit risk borrower,” Ulzheimer explained. “The exact opposite is true if you have horrible credit. You are a high-risk borrower and lenders should probably avoid you. The same goes true if your credit score is roughly average.”
For service members, poor credit can do more than empty your wallet. It can threaten your career. The Department of Defense announced last year it would begin “continuously” monitoring the financial status of service members holding security clearances, a process that includes an automated review of credit files. Previously, financial background checks were done once every five to 10 years.
“This new process might impact your DOD security clearance and prevent you from being deemed deployable, which could greatly impact your military career unless you can prove to the DOD that you were the victim of identity theft, fraud or a mistake and that you’re currently living within your means and are making a good-faith effort to resolve your unpaid debts,” the Consumer Financial Protection Bureau stated when the change was announced.
If you are looking for ways to improve your credit score, here are some smart moves to make:
- Annually request a free copy of your credit report from AnnualCreditReport.com. Correct any errors using this sample letter: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report
- Use the Service members Civil Relief Act to reduce interest to 6% on all loans including auto, credit card, student and mortgages taken out before joining the military. Note: Some credit card issuers like Capital One, USAA, Discover and U.S. Bank extend SCRA benefits beyond what is required by the law and may retroactively refund interest or fee charges, cap rates below 6% or extend benefits to spouses.
- Consider paying down debt using a “debt snowball.” Pay off your smallest debt first while making minimum payments on larger debts. Once the smallest debt is eliminated, roll the amount used to pay off the first debt into a larger payment on the next smallest obligation.
- Be selective in choosing a new card — when picking a secured credit card to repair credit or build a credit history — and make sure it reports to all three major credit bureaus.
- Avoid balance transfer credit cards with low introductory interest rates but high transfer fees.
- Sign up for free credit monitoring for military service members, which was required by law beginning on May 25, 2019.