Why Your Credit Score Matters … and How Troops, Veterans, and Families Can Increase Their Numbers
Credit scores can make a big difference in your life in ways you might not realize.
While there are gray areas in the way these scores are calculated, there are also clear ways to start moving the needle in the right direction – actions that can improve your credit score in just a matter of months.
Your payment history on time (or not) has the biggest effect on your credit score, accounting for 35% of the figure. Change everything bad habits in this regard can make the difference – quickly.
“It’s frustrating for many consumers, but being late just once on a single credit card can hurt your credit score,” said Gerri Walsh, senior vice president of investor education at Financial Industry Regulatory Authority, better known as FINRA.
Manage the amount of money you owe is the second most important factor, accounting for about 30 percent of your credit score. Lenders look at how much you owe in total, versus how much credit you have.
Companies calculate credit scores differently, but a score of 720 – over a range of 300 to 850 – is generally considered good, Walsh said.
“Credit score is like your financial GPS,” she said. “It tells lenders how likely you are to pay off a loan they might give you. It is a barometer of the type of risk you might present as a borrower. If you have a good score, it can get you on favorable terms for a loan that you might apply for.
If the lender considers the score to be too low, they will not offer you a mortgage, car loan, personal loan or other financial product, at least not at the rate you are looking for.
Homeowners can review your credit health in deciding whether to rent their property to you, which could be a problem for military families who relocate a lot. Insurance companies and the like can use credit scores to determine prices.
SCORE VS. REPORT
Your credit report is a snapshot of your financial situation at a given point in time. Your credit score lives, breathes and changes, said Andia Dinesen, a military wife who is a certified financial advisor and who has worked with military personnel and their families. She is vice president of communications and operations for the Association of Military Banks of America.
The report comes from information provided by lenders such as banks, credit unions and credit card companies to the three credit reporting agencies. It includes details on account type, date opened, credit limit, account balance, and credit history.
Information desks also collect public information regarding bankruptcies, foreclosures and other transactions from state courts, as well as details of overdue debts from collection agencies.
The score is calculated from the information contained in these reports. Active-duty troops and their spouses may obtain a Free FICO Score (published by the Fair Isaac Corporation) via the FINRA Investor Education Foundation.
According to myFICO.com, the calculation of the FICO score generally comes from five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit combination ( 10% – the more diverse your credit, the better your score here).
BUY THE SCORE
Dinesen said that when working with military personnel and spouses on their finances, most problems with lower credit scores were due to late payments.
“Most people don’t realize how much this affects their credit score,” she said.
Customers who stuck to a plan to improve their finances would see their scores increase the next time she visited them, simply by paying their bills on time, she said.
Military installations have personal financial management experts who advise military members and families on how to improve their finances and, therefore, their credit scores. OneSource Military also offers free financial advice and can connect troops with advisers.
Walsh also suggested contacting a local nonprofit credit counseling agency through the National Foundation for Credit Counseling.
For some people, it takes a long time to build up a credit score. Walsh warns people to be aware of “that personal toll” when paying for something with a credit card, for example. Find out if you can pay off that balance at the end of the month, and if not, what the increase in your overall debt will do to your credit score.
Once you’ve paid off a credit card, don’t cancel it and stop using the credit. The length of your credit history is important. Put the card in a hard-to-reach place, but use it once or twice a year to buy something small and pay it back.
GOAL? WHAT SCORE?
According to myFICO.com, to receive a valid FICO score, there must be at least one account open for at least six months, and at least one account that has been reported to credit bureaus in the past six months.
This means that “a lot of very young soldiers have no credit,” Dinesen said.
If they are determined to buy a vehicle on credit, for example, they can pay exorbitant interest rates.
What is the solution ? Dinesen advises working with a bank or credit union to get a secure credit card – users deposit an amount, such as $ 500, which becomes the credit limit. By using the card within the limits and paying the bill on time, you can create a credit history.
Need this car now? All is not lost, Dinesen said: try refinancing later, at a lower rate, after you’ve established a credit score… and made all payments on time.