Many people in the military today may be set to leave active duty and return to civilian life, but some may not know that an important component of doing so successfully includes taking the time to make sure they have good credit scores.
There is obviously a lot that can go into determining whether a servicemember has a good credit score, and he or she will likely have some serious work to do to make sure their credit rating can improve to the best level possible given the circumstances. Some of the most common ways in which servicemembers might have to boost their standings are also those that have the biggest effects on their scores in general, but some minor issues might also be what's keeping them from making sure they have high-quality ratings.
What goes into a good credit score?
There are five considerations used when determining a person's credit score, and for the most part, the biggest factors are linked to the most common mistakes people might make when dealing with their various accounts. For instance, the largest consideration that goes into making up a servicemember's credit rating is whether he or she has been able to stay current on paying all his or her debts on time and in full every month. This factor alone makes up 35 percent of a score, and even one mistake in missing a deadline or not meeting a minimum payment will have a huge negative impact that months of proper payments can repair as well as seeking the assistance of a credit repair law firm.
The second-largest determining factor comprising a person's credit score is the amount of debt he or she carries at any one time as a percentage of the total credit limits on his or her various credit cards. This is called a "credit utilization ratio," which makes up 30 percent of a rating, and contrary to a popular myth, lenders want to see consumers borrowing as little as possible if they want to max out this portion of their scores. While in an ideal world everyone would simply pay their bills on time and in full every month, that's not always feasible, so lenders instead set the cutoff line for maxing out this part of the score at 30 percent of total limits. Any more than that, and the rating will begin to fall.
Another 10 percent of a person's score is made up of the amount of different account types in his or her name. That includes credit cards, auto financing, student loans, mortgages, personal loans, and so forth, and the greater variation lenders see listed on a person's credit report, the better this portion of his or her score will be.
Lenders also like to see borrowers who have had their accounts for a long time, which indicates that they can generally handle their accounts and keep them in good standing for years. For this reason, the average age of all accounts in a person's name makes up another 15 percent of a score, and the longer the better.
And finally, the number of times a person has applied for credit in the last several months makes up the final 10 percent of a score, with more inquiries being considered bad, a potential indicator that a would-be borrower has had some recent cash flow issues that might make him or her a riskier investment.
So what is a good credit score?
While borrowers may be able to obtain certain types of financing with virtually any credit score, people who want to start getting access to high-quality loan terms should aim to have credit scores of about 700, but obviously the better their scores are, the more advantageous the terms on any new line of credit. Those whose scores top out at more than 750 will generally get the lowest rates, smallest fees and best rewards. And the good news is that for most people, there may not be all that much work to do to improve their credit scores to these levels, as the vast majority of ratings nationwide fall between 600 and 750 to begin with.
For this reason, it's vitally important that servicemembers make sure all their payments are on time, and they're making comprehensive efforts to cut whatever sizable balances may exist in their names. And those with low credit scores should do a little bit of repair work before applying for any new financing, just to make sure they're getting the best terms possible, and avoid rejection.
Finally, it may be wise for military members to also order copies of their credit reports and check them over closely for any unfair markings that can drag their scores down further. If any are discovered, working with a credit repair law firm may help to get their standings back to where they deserve to be.