One thing that many military members may not consider as part of their coming off active duty and returning to civilian life is the importance of taking the time to work on repairing their credit.
Millions of Americans are in need of some amount of credit repair, regardless of whether they ever served in the military, and servicemembers are no different. Having a good credit score can mean the difference not only in whether a person is approved for a line of credit he or she might want — whether it's a credit card, an auto loan or even a mortgage — but also exactly how much that applicant will pay for that account if approved. A person's credit standing is used to set interest rates and other charges he or she might incur, such as annual fees, points, or how much the account will cost up-front.
Further, some employers even use potential workers' credit standings to determine whether they should be eligible for jobs for which they have applied. While some states outlaw the practice, many others do not, and some employers believe that this method helps them find the most reliable candidates possible. Therefore, when leaving the service and looking to begin a new career, servicemembers should do all they can to get their credit in order and return their credit standing to where it ought to be.
How to do it
There are two rather common issues that might weigh borrowers down when they are trying to get their credit score up to snuff. The first, which is extremely common, is that they've simply missed payments in the past. This factor alone accounts for 35 percent of a person's score, and therefore even one missed payment, whether it's by a single day or a month or more, can take a huge chunk out of a credit rating as a result. For many military members, especially those who had families at home while they were away serving their country, missed payments can just be a fact of life, particularly if their spouses cannot work and take care of their children at the same time.
However, when returning home, the way to go about fixing the problem is to simply start making all payments on time and in full. Also seeking the help of a credit repair law firm to assist in challenging negative items on your credit reports can be very effective. But even one more misstep will put them right back where they started.
Another common credit mistake into which people of all backgrounds may fall is simply having too much debt as it relates to the overall limits on their credit cards. This is a factor known as "credit utilization ratio," and despite a common misconception, lenders don't want to see borrowers carrying a lot of outstanding debt. Instead, it's generally recommended that people who want to max out this portion of their rating, which accounts for another 30 percent of their score, they should likewise try to keep the amount they owe to 30 percent or less of their total limits. For instance, people with a total limit of $10,000 spread across a number of cards should keep balances at $3,000 or less to make sure they aren't taking a credit hit in this way.
What it will mean
Once a former servicemember has addressed these credit issues, his or her score will likely have been boosted considerably from where it was when the soldier was on active duty. This will likely open more access to a larger number of credit accounts which, if utilized properly, can further increase credit ratings by adding to credit mix, which makes up another 10 percent of their score. Essentially, this is made up of the different types of credit a person has in their name, and more is better. For instance, those who have a mortgage, auto loans, student loans and credit card debt, and manage them all successfully with regular on-time payments will be in better shape than if they had just one or two of those accounts outstanding.
However, opening new accounts might cause borrowers to take a bit of a hit in the average age of their accounts, which makes up another 15 percent of their rating, but only time can smooth over that issue. Likewise, they will likely take a small hit in terms of recent inquiries for new credit, which make up the final 10 percent, but that too will go back to being maxed out over the course of 12 months if they are not submitting numerous applications.
Finally, those trying to improve their credit score should also take the time to order copies of their credit report and check them over for any unfair markings. If these are discovered, it can be wise to contact a credit repair law firm, which may help them to remediate the issue.