What does it take to get good credit when you are joining the military? And what does it take to leave military service with a good credit record and a higher FICO score? For some parts of this financial management equation, the simplest answers are absolutely right and a great place to begin.
But getting and keeping a good credit rating is more complex than just paying your bills and not abusing your credit. Fortunately there are programs offered by all branches of service that can help you add to your current efforts to build or maintain your credit.
Signing Up And Getting Out: Both Require Financial Prep
When many new recruits join the Army, Coast Guard, Air Force, Marine Corps, or the U.S. Navy, they do so anticipating a steady government paycheck and (for some) an end to some kinds of financial uncertainty.
But when you join or leave the military, there are some things that can trip you up creditwise; being aware of them when you enlist or separate from active service will help you go a long way toward preventing future problems.
Some Basic Pitfalls To Avoid Like The Plague
That headline sounds a bit extreme, doesn’t it? But late and missed payments are among the leading causes of credit score damage according to the three major credit reporting agencies. Among the biggest problems in this area?
The Manual Payments Problem
People who still make manual payments who are retiring or separating and have to travel, especially those separating from an overseas military base who aren’t going “back home” to the U.S. right away.
In these cases, manual bill payments are a liability because it is far too easy for a detail or two (including rendering an online or snail mail bill payment) to get lost amid the packing up of your household goods, getting tickets and making travel arrangements plus working with the sponsor at your gaining base, preparing for a new job, etc.
To fully protect yourself, it’s best to anticipate delays associated with making your manual payments and plan accordingly. If you plan ahead, you won’t miss manual payments and you’ll spare yourself damage to your FICO scores as a result.
PCS Moves Can Be More Expensive Than You Realize
Some PCS moves are from less costly areas to more expensive locations. Are you taking an assignment in an overseas location where the dollar doesn’t do well against the local currency? Or are you being reassigned to high-cost areas such as Los Angeles, San Diego, Washington D.C. or New York?
Some people get into financial trouble during the transition from a cheaper place to live; anticipate these issues and consider the resources available to you to ease that transition including advance pay, or even financial relief from one of the military aid societies.
Organizations like the Air Force Aid Society, Navy-Marine Corps Relief Society, Army Emergency Relief, and others are available to help in cases where the need is greater than advance pay or other solutions. These are need-based services, and troops can also explore their on-post options for financial counseling
Financial Responsibility: Advice For New Troops
New recruits likely aren’t as informed about DoD policy on financial responsibility as those who are retiring or separating. And believe it or not, financial irresponsibility is a leading cause of military disciplinary issues.
In fact, financial problems are a serious threat to security clearances depending on the nature and severity of the issue.
Consider what the government’s own financial watchdog agency, the Consumer Financial Protection Bureau, has to say about debt management among the troops: “Military personnel who have trouble handling their personal finances can very quickly find their duty status, potential promotions and even military careers in jeopardy.”
What do new recruits need to know about joining the military? There WILL be scrutiny on your finances, especially if and when you begin using a government-provided credit card for official travel.
Any misuse or failure to pay on a government travel card can bring swift disciplinary action; expect to have more eyes on your use of credit than you are used to if you are shipping out to basic training soon.
New recruits may or may not be issued a government travel card at their first duty station; much depends on the nature of your career field and how much official travel may be required. Some career fields may not require much travel, while others may have people on the road two to three weeks a month.
With or without the added detail of having a government card, the financial responsibility portion of what those in the military sometimes call “the whole person concept” cannot be underestimated.
Financial Planning: Advice For Those Retiring Or Separating
We’ve already addressed the manual payments issue, but one area that can affect your ability to get credit as a retiree or as someone separating but not retiring? Your employment status.
Let’s say you want to apply for a home loan using your VA Loan benefit. Being approved to use the benefit does not mean you are approved for the loan; all applicants must financially qualify the same as with any other type of mortgage loan.
When you apply for the loan, one of the big areas your lender is interested in is your income and work history. If you leave military service, your ability to qualify for a loan like a house or auto loan can be compromised depending on when you choose to apply for this credit.
Getting Credit Without A Job?
Applying for credit without an employer can be tricky; retired people do it all the time but if you’re new to this concept you should research what it means to do so before you fill out any blank forms. Why?
Employment and income go hand in hand when it comes to verifying a borrower as a good credit risk. If there is no employer, the lender needs to see a tangible reason why and how the applicant can afford the loan.
This is done using retirement income, any applicable investments, savings, etc. The total amount of the applicant’s monthly cash resources are the important thing here.
Financial Planning: Retirement Versus Separating
If you are retiring from the military, chances are good that you have a savings account, a retirement plan such as a 401(k), etc. You will need complete documentation of your anticipated income once you have made the transition in order to satisfy lender requirements.
But if you are separating instead and are not yet ready to retire, the timing of your application is crucial. Why? The income factor is key. Those in highly-skilled occupations have an easier time finding a new career on the outside of the federal workforce.
That’s especially true in critically-needed areas such as education, law enforcement, medicine, etc. If you have skills that more people use and are competing in a crowded job marketplace, it may take you longer to find work.
Let’s look at an example from the FHA Home Loan rulebook, HUD 4000.1. We could cite VA loan rules instead, but VA home loans tend to rely more on lender standards, where FHA mortgages tend to have more regulations that cover a larger pool of applicants. FHA loan rules say that the lender is required to verify at least two years of employment.
Some wrongly assume that means two years with the same employer. It doesn’t have to, but if you have just started a new job and apply for a major line of credit within the same year of doing so, you risk being denied on the basis of the lender’s not being able to determine if the new job is likely to continue.
Depending on circumstances, it might not be a problem at all, but for some applicants the time spent in the current job may be a deciding factor.
Not All Credit Is Big Credit
The issues mentioned above about home loans don’t necessarily apply to smaller lines of credit, store cards, etc. But this is an area that can be dangerous, too. Just because you qualify for credit at a lower level doesn’t mean you should have or use it.
Too much credit utilization can affect your credit scores–the age of your credit accounts and how close to the credit limit you are will play a role in how your credit score is calculated.
Don’t open a bunch of new credit cards when you get back to the United States if you are getting out overseas, and avoid the temptation to open a new line of credit if you have to make a “CONUS move” instead within the United States and its territories.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News
