Financial Fundamentals: Establishing and Improving Your Credit History
People often say that credit is a measure of a person’s character. It is more than just some nebulous concept, however: One’s credit history can have a very real impact on all areas of life. That is why it is essential to understand why credit is important, how to establish good credit and how to manage and monitor credit.
Establish Good Credit Early
Young adults typically have very low credit scores. This is because they tend to have very short or even nonexistent credit histories. But even without a credit card, it is still possible to build credit. Service members can seek secured credit cards, which require a cash deposit with the creditor. If the cardholder does not make payments on the card, they forfeit their deposit. Because the creditor has little risk, even applicants with poor or no credit are likely to receive approval.
Service members should read the fine print regarding secured cards’ annual fees and other costs, which may qualify for waiving or lowering under the Military Lending Act or Servicemembers Civil Relief Act. It is also important to confirm that the lender is going to report activity to one of the three nationwide credit bureaus — Equifax, Experian and TransUnion. These credit bureaus track regular, on-time payments — which help establish good credit — and late payments, which negatively impact credit. This applies to all types of loans, including car loans, signature loans and credit-builder loans.
Credit-builder loans are small installment loans that some banks and credit unions offer. These loans operate in much the same way as secured credit cards. They generally receive backing from a deposit that the institution sometimes holds in an account. Service members should be aware of the interest rate they are paying. In some instances, part of the interest may be refundable once they pay off the loan.
Store credit cards are typically more forgiving when it comes to extending credit to customers with low or no credit. Service members should be cautious when applying for credit, however, and make sure they understand all of the terms of credit as well as the available protections.
Why Credit Scores Matter
Many people know their “number” — their credit score. But most people don’t realize how much impact these three digits can have on every aspect of their lives.
A low credit score may mean a rejection for a credit card application or an approval for only a very small amount of credit. A car loan may not receive approval, or get an approval but carry a much higher interest rate resulting in paying much more over the life of the loan.
Auto insurance premiums may be higher for those with poor credit. Utility companies may also pull credit reports and require a deposit from a customer with a low score.
Landlords and apartment complexes are increasingly requiring credit reports from potential renters.
The biggest impact of a low credit score has for service members, however, is that it may negatively affect security clearances and military careers.
Managing and Maintaining Credit
The single biggest tip for establishing and maintaining credit is to pay all bills on time. Even paying one day late can result in late charges and penalties. Since interest is typically compounded on a daily basis, there will also be interest charges that accrue.
Some creditors may immediately report late payments to a credit bureau. This will cause a dip in credit score and the late payment will generally stay on the consumer’s credit history for seven years.
A good way to keep payments on track is to automate them whenever possible, using a bank’s bill pay system or allotments. This way, even if service members are traveling or deployed, they can still stay current with their bills.
Military members and their families should check their credit report annually at a minimum. They can do so at no cost at AnnualCreditReport.com — the only site the federal law directs to provide credit reports. Installation personal financial managers and personal financial counselors can also help interpret credit reports and scores without charge.
Conclusion
A poor credit history can impact nearly all aspects of a service member’s life. By monitoring credit reports and maintaining a good record of on-time bill payment, however, military members can successfully build or maintain their credit, which will help to achieve both financial and professional success. Service members and their families should consider visiting their installation’s personal financial managers and counselors for more information and assistance.
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