Improving Your Credit Score In The Military

Our ability to borrow money (e.g. VA home loans, car loans, etc.) revolves around our credit score. A good score allows for more loans and better rates, while a bad one may completely prevent someone from loan approval. Bottom line, having solid credit is critical to the financial health of service members. As such, we’ll use this article to outline steps to improving your credit score in the military.

Specifically, we’ll discuss the following:

• Credit Score Overview
• Why Credit Matters to Military Members
• Ways to Improve Your Credit Score on Active Duty
• Final Thoughts

Credit Score Overview

People often throw around the term credit score without actually defining it. Prior to outlining how to improve your credit score, we’ll briefly define the term.

Your credit score is a number between 350 and 850 that defines your creditworthiness, that is, how likely you are to repay debt. Higher scores indicate higher creditworthiness, whereas a lower score means that you are a more unreliable borrower. Technically, this three-digit score is known as a FICO (Fair Isaac Corporation) score, and three major credit agencies (Experian, Equifax, and Transunion) generate these scores based on several factors, including:

• Your payment history (e.g. credit card and loan payments)
• The total amount of money you owe
• Length of credit history (i.e. when you opened your first credit account)
• Types of credit you have
• Frequency of new credit inquiries and accounts

Of the above factors, payment history plays the largest role in determining your credit score. That is, do you make your payments on time, or have you had some late payments? According to a CNBC study, payment history makes up 35% of your total credit score calculation.

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What’s A “Good” Credit Score?

Most lenders and credit agencies divide borrowers into the following tiers:

• Poor: 300 – 579
• Fair: 580 – 669
• Good: 670 – 739
• Very good: 740 – 799
• Exceptional: 800 – 850

Generally speaking, better credit scores allow you to qualify for more loans at better rates. 

Why Credit Matters to Military Members

To be clear, credit scores matter to all Americans. But, military members in particular have several reasons why credit proves so important.

VA Loans

VA loans provide eligible service members an outstanding mortgage option. With these loans, you can buy a new home with no down payment, and you won’t need to pay private mortgage insurance. But, to qualify for one of these home loans, you’ll need an acceptable credit score.

Technically speaking, the Department of Veterans Affairs does not impose a minimum credit score for VA loans. But, the VA only administers the program, while individual lenders originate and service the mortgages. And, many of these lenders require a credit score of at least 620 to qualify for a VA loan.

Furthermore, the higher your score, the better the interest rate you can receive. This can save you tens of thousands of dollars over the life of a loan. For example, say you take out a $250,000 VA loan to purchase a home. With a score of 780 (“very good”) you’ll likely qualify for the best rate, let’s say 2.5%. But, if your credit score drops 100 points to 680 (“good”), that rate could jump to 3.0%. This 0.5% increase translates to over $24,000 in extra interest payments over the life of a 30-year mortgage!

USAA and NFCU Auto Loans

Lenders also closely consider credit scores when reviewing auto loan applications. Fortunately, military members have access to two incredible lenders: USAA and NFCU. Both of these military-friendly institutions offer outstanding terms on auto loans.

But, as with VA loans, these lenders require minimum credit scores to qualify for a loan. In a report on auto loans, USAA stated: As with most types of borrowing, your approval to borrow and your interest rate depend in part on your credit score and history. In other words, a low credit score can potentially prevent loan approval. And, even if you do qualify for a loan, a lower credit score will lead to a higher interest rate.

Security Clearance Issues

Of particular concern to service members, poor credit can indirectly affect your security clearance. While no official minimum credit score exists for security clearances, financial factors matter – a lot.

Financial issues consistently rank as the number one reason why people have their security clearances denied or revoked. First, if you face major financial issues, those issues may speak to your reliability. While some financial problems arise for issues outside of our control (e.g. medical emergencies), risky investments can also create problems. If you’re willing to take huge gambles with your financial health, the government may question your judgment when it comes to national security matters.

Second, major financial issues can open you up to blackmail and other manipulation. If you end up owing too much money, you may expose yourself to negative influence, with someone forcing you to compromise security matters to forgive debt.

A low credit score – for better or worse – suggests both unreliability and vulnerability. Accordingly, low scores can prove particularly troublesome for military members applying for or renewing a security clearance.

Ways to Improve Your Credit Score on Active Duty

Having outlined the reasons why credit scores matter so much to service members, the question remains: how can I improve my credit score while on active duty? While you can pay a credit repair agency to assist you in improving your score, most borrowers can make major improvements with a few simple steps:

Make All Payments on Time

As stated above, payment history plays the absolute largest role in determining your credit score. By making your loan and credit card payments on time, you will gradually improve your credit score. Conversely, one late payment can significantly lower your score. To avoid accidental late payments, you may want to consider setting up automatic payment plans.

Maintain Low Credit Card Balances

Credit utilization serves as another major factor in your credit score. That is, of your available credit, how much do you actually use? Say, for instance, you have a $20,000 credit card limit. An average balance of $2,000 translates to 10% credit utilization ($2,000 / $20,000). Credit reporting agencies generally want to see credit utilization rates below 30%. But, the individuals with the best credit scores typically have utilization rates in the single digits.

Understand What the Credit Reporting Agencies See (and Don’t See)

Not all monthly payments are reported to credit reporting agencies. Unfortunately, rent payments do not affect FICO scores (though they may be reported to credit agencies). This means that paying your rent on time won’t improve your credit score. Understanding this, individuals should open at least one credit account (e.g. credit card, auto loan, etc.) that will be reported, and then use that credit responsibly. By establishing an open credit account, you begin the process of building an associated credit score.

Regularly Review Your Credit Reports

If you don’t understand the factors affecting your own credit score, it’s hard to improve those factors. Federal law allows Americans to request a free copy of their credit reports (scores and all associated factors) once a year from each major credit reporting agency. That means that borrowers can review detailed reports – for free – at least three times a year. By doing this, you’ll arm yourself with the information necessary to improve your credit scores. That is, if your credit report highlights a negative factor, you can focus your efforts on improving that specific credit factor.

Final Thoughts

Credit scores certainly affect all Americans. But, for service members in particular, having a good credit score is extremely important. By following the above recommendations, individuals can take solid strides towards improving their credit scores in the military.

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Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.

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