How to Protect, Improve Your Credit Score

Your credit rating is important for a number of reasons. It affects the interest rate you will receive if you want to purchase a home, refinance your current mortgage loan, or finance a car purchase. Your credit rating can also affect your ability to rent a place to live, find employment, or buy insurance at a good rate.

Military servicemembers who have security clearances need to pay extra attention to their credit ratings. This also applies to civilians (including former military servicemembers) who need a security clearance for the contract work they do with the military or government.

Serious credit problems can result in:

• Notification of your Command,
• A loss of clearance,
• Denial of promotions,
• Removal from a work assignment.

To build and maintain a healthy credit rating, it is important to understand how credit functions and how it relates to your basic finances. You need to deal with your credit and any debts you take on in a responsible manner.

Protect your credit by taking the following steps:

1. Monitor your credit. Review your credit report regularly. You can get a free credit report from each of the three bureaus once a year at annualcreditreport.com. Check it for any inaccurate information and dispute any inaccuracies you find. See if your report contains collection accounts or derogatory information in your public records area that you need to address. 

2. Analyze your finances. Make a personal budget. Review how much income you bring in and how much you spend each month. Be sure to plan for expenses that occur irregularly, such as car registration and repairs, property taxes, and any schooling costs. Make sure you have an accurate account of all your debts, including the amount, the interest rate, the servicer, the monthly payment, and the payment schedule.

3. Control your spending. Most everyone has expenses that could be trimmed. This is especially important if you are paying high interest to service any of your debts. By saving money on everyday expenses or even luxuries that can be eliminated, you can build up extra income that can be applied to your debts.

4. Focus on paying off delinquent accounts. After you have identified extra income or savings, begin to apply it to any accounts in collection first. If you sweep them under the rug, you risk getting sued, which can lead to a judgment against you, a wage garnishment or bank levy, and potential problems with the military. For more serious debt issues there are professional debt relief options, including debt consolidation, credit counseling, debt settlement, and bankruptcy. Before you sign up for one, check with a military ombudsman about how a specific debt relief option will affect you.

5. Pay down high-interest rate remaining debt. Once you eliminate any delinquent accounts, or if you don’t have any, begin to allocate extra payments to your highest interest rate cards or accounts next. This will save you the most money in the long run.It is important that you continue to at least pay the minimums on your remaining accounts, so they don’t enter collections. 

6. Practice good credit habits. Once you have paid off your debts, you can begin to improve any damage to your credit score. If you do not have any credit issues, it is important that you maintain good credit habits to prevent potential drops in your score. Here are three basic good habits that you can use to improve or maintain your credit:

• Make all payments on time: A late payment does not show on your credit report until you are 30 days late, but being even one day late can lead to a drastic hike in interest rates. If you are hit with a penalty interest rate, which can be over 30% interest, it can throw off your budget, cost you money, and lead to other financial problems.

• Lower your credit utilization: This is the 30/30 rule. Roughly 30% of your credit score is based on how much of your credit line you are using. To prevent a drop in your score, keep your credit utilization below 30%. For instance, if you have a $2,000 credit card line, you should keep your running balance below $600. Of course, it is always best to avoid interest charges and pay the balance in full.

• Avoid minimum payments: Don’t get caught in the minimum payment trap. Read your statements carefully. The Credit Card Reform Act of 2009 requires that credit card companies show the total cost of your debt and how long it will take to pay off if you only make minimum payments. Minimum payments will cost you thousands of dollars and extend your debt over years. Instead, pay a consistent dollar amount beyond your suggested minimum.

It is important that you take your credit score seriously. Employ a balanced offensive and defensive strategy to protect and improve your credit. Practice good defense by dealing effectively with any debts or delinquent accounts. Practice good offense by developing and maintaining good financial habits.