In the midst of one of our nation's worst credit crises, more than ever, credit scores are a vital part of your financial uniform. How can you spit-shine your score?
First, let's look at the basics. In a nutshell, a credit score reports whether an individual is a good credit risk. Scores range between 300 and 850 — the higher the score, the better. Creditors use the scores to judge whether a person will repay debts. Credit scores are based on credit history, as shown on your credit report, including debt payments, amount owed and whether you missed or defaulted on any loans.
Credit scores determine interest rates, whether you can get a loan at all (for a car, a house or another asset), or even whether a landlord will rent you an apartment. Even car insurance rates depend somewhat on credit, as insurance companies use certain elements of credit to predict how likely drivers are to file an insurance claim. And troops who have severe financial problems can lose security clearances, face sanctions, limit advancement possibilities, or even be discharged.
Many military families, especially those with a spouse on active duty, face financial challenges, some of which can create serious consequences. Whatever your situation, try these tips to improve your score:
1. Check your report. The first step to building credit is knowing your starting point. By law, all U.S. residents can review their credit report for free once a year. Visit http://www.annualcreditreport.com to request your report. You'll also find helpful instructions at this site on taking care of any inaccuracies, which you need to report — in writing — to the credit bureaus.
2. Create a budget. A household budget, or spending plan, is your roadmap to financial security. Budgeting need not be complicated. A good, simple, easy to use plan requires only pencil and paper. Remember that good credit comes from living within your means. Do not fund your lifestyle on a credit card.
3. Pay on time. Pay all credit cards on time. On-time payments are the No. 1 factor in determining a credit score.
4. Defend yourself when deployed. Deployed servicemembers face the risk of mounting bills and interest. A soldier in a war zone may not receive or be able to pay timely bills. The Soldiers' and Sailors' Civil Relief Act (SSCRA, also known as the Service-Members' Civil Relief Act or SCRA) can cap annual interest rates at 6 percent while you're deployed. However, the cap applies only to debt incurred before beginning active duty. You must request this relief in writing from your lender. Include proof of mobilization and proof of the difference in military and civilian pay. If you have student loans, call the lender to ask if they can lower or defer interest while you are deployed.
5. Pay off debt. Develop a plan to pay back debt. First, pay the debt with the highest interest rate. When it is paid off, pay more on the debt with the next highest interest rate. Continue until you are debt-free. Always make at least the minimum payment on every debt and always prioritize house payments.
6. Request credit limit increases. Ask your credit card issuers for credit limit increases on each of your cards — but don't use the extra credit you obtain. Although issuers are increasingly reluctant to grant credit limit increases these days, a large factor in determining your credit score is the ratio between the amount you owe and your credit limit. By increasing your limit, you can improve this ratio and your credit score.
7. Fight identity theft. Identity theft is at an all-time high, and it can firebomb credit ratings. Most identity theft occurs "offline," not through the Internet. Shred paperwork with private information such as account numbers or Social Security numbers. Be cautious and keep records locked up. If you're deployed, be sure your bills and financial statements are going to an address you trust. Record important financial information and account numbers in a secure place. Never give out personal information in e-mails or in a phone call you did not initiate. If an offer sounds too good to be true, it probably is. Don't bite.
Your military discipline is the perfect tool to apply to your credit rating. Just as a commanding officer may judge a Soldier by the shine on his shoes, lenders, employers, insurers and landlords will judge an applicant by the polish on his or her credit history. Taking the time to make a good impression will pay off.
For more information about protecting your finances, visit Military.com's Finance channel.