Build Your Credit, Step by Step
By Ethan Ewing
Winter 2008-09
Money and credit are tight these days, so many people are concerned about credit scores. But what is your credit score, and how can you get a good one?
In a nutshell, a credit score is a reflection of an individual’s credit risk. Creditors look at your credit score – or FICO score – to gauge the likelihood that you will repay your debts. Scores typically range between 300 and 850. Credit scores are based on credit history, including debt payments, amount owed and defaults on any loans. The higher your score, the better.
Many military families face financial challenges that can create serious consequences. Among junior enlisted members, for instance, 19 percent have failed to make minimum credit card payments and 11 percent have bounced checks. Members of the military use payday loans three times as often as civilians. (Source:
Before building credit, it helps to know your starting point. By law, all
Create a budget. A household budget, or spending plan, is your roadmap to financial security. Good credit comes from living within your means. Do not fund your lifestyle on a credit card!
Defend yourself when deployed. Deployed servicemembers face the risk of mounting bills and interest. A servicemember in a war zone might be out of reach until the account has accrued so much interest that accumulated bills can't be paid – and his or her credit might be destroyed. The Servicemembers' Civil Relief Act can protect you from skyrocketing interest by capping annual interest rates at six percent while deployed. The cap applies only to debt incurred before beginning active duty. You must request this relief in writing from your lender; include proof of mobilization as well as proof of the difference in military and civilian pay. Also, call your lender to ask about lowering or deferring interest on any student loans while deployed.
Pay off debt. Develop a plan to pay back debt. Pay the debt with the highest interest rate first, then pay the debt with the next highest interest rate. Continue until you are debt-free. Always make at least the minimum payment on every debt, with your house payments the top priority.
Earn a credit history. If you have no credit history, build one. Carefully charge a few expenses you know you can pay in full when the bill comes. Pay the entire bill on time every month to avoid interest charges. Or take a small loan from your bank or credit union to purchase a used car or a small item such as an appliance. Pay the loan on time and in full. If you have student loans, pay those on time every month. On-time payments are the no. 1 factor in determining a credit score.
Fight identity theft. Protect yourself from those who could root through your trash, steal your account numbers online or obtain personal information through e-mail "phishing" scams. If you are deployed, make sure your bills and financial statements are routed to an address you trust. Record important financial information and account numbers in a secure place. Never give out personal information in e-mails or in a phone call you did not initiate.
A good credit history is like a successful military campaign: It takes careful planning to create a strategy that will pay off in victory when placed into action. Apply your military discipline to strengthening and maintaining your credit rating. Your hard work will benefit you and your family for years to come.
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Ethan Ewing is president of Bills.com,where consumers can learn about personal finance issues and comparison shop for products such as credit cards, insurance, mortgages and other loans. Bills.com’s Operation Debt Storm offers tips, tools, calculators, a “Debt Freedom” guide and a personal finance consultation, plus a discount on debt resolution services. Ethan can be reached at eewing@bills.com.
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What If You’re Denied Credit?
If you or your civilian spouse are denied credit for a purchase, you have the right to know why. You also have the right to review your credit report for free within 30 days of denial.
If your credit cards were maxed out, work to pay off some cards before reapplying. If you have too much debt on existing cards, pay down the debt to free up more credit.
If your income level was too low, consider buying a less-expensive item. Civilian spouses, reservists or veterans might consider taking a second job to earn additional money. In both cases, check with the lender to see what criteria you need to meet. For instance, you might need to keep a second job for at least six months to qualify.
If the credit report shows errors, request a correction. Send a written request to the credit reporting agencies that are reporting the error. Corrections can take up to 45 days. You can ask the agency to send a corrected report to creditors who have received the report during the last six months or employers who have received the report within two years.
If you find fraud on your report (charges or accounts you did not open), place a fraud alert on your report. Find out how to do this from the Federal Trade Commission at www.consumer.gov/idtheft/con_steps.htm.