How Debt and Credit Score Affect Security Clearances

It’s the opportunity you’ve wanted. More responsibility, bigger paycheck, maybe a step up in rank. Now it’s yours, assuming you get the security clearance the new position requires.

But as the military’s mandatory background check begins, your private life suddenly is no longer your own. For active-duty service members, the security clearance process starts with a detailed questionnaire about, among other things, your mental health, any past criminal activity or substance abuse, your sexual behavior … and, oh yeah, your credit.

Like the others, that last one can be a deal breaker. Your credit and debt will be a primary factor in whether you are granted security clearance. In fact, it’s far and away the most common reason security clearance requests are denied.

It’s important, then, for active service members to stay on top of their credit, not only to get security clearance in the future but also to keep the security clearance they might already have.

“I’ve done 3,500 [security clearance] cases,” says longtime security clearance consultant and attorney Alan Edmunds, the owner of The Edmunds Law Firm. “The No. 1 reason for the government to take away a clearance for active-duty military members or civilians is financial concerns.”

In an email exchange, a spokesperson for the Defense Counterintelligence and Security Agency confirmed Edmunds’ point, saying that so far in Fiscal Year 2022, financial considerations have been “the most frequently cited security concern or potentially disqualifying condition of the SEAD 4 Guidelines for security clearance denials and revocations.”

SEAD 4 (Security Executive Agent Directive 4) provides the guidelines for national security adjudication.

Last year, 69% of appeals heard by the Defense Office of Hearing and Appeals board were for security clearance denials on the grounds of financial considerations. The next most common reason for denial was personal conduct, and only 20% of the appeals the board heard were for that reason.

In 2020, the percentage of appeals for financial considerations denials was 54%.

The credit check during the background investigation is intended to find out if you’ve been keeping up with your financial obligations. Generally, there aren’t hard-and-fast rules about your credit that determine whether you are granted or denied a security clearance. Reviewers approach applications on a case-by-case basis so they have some room to interpret the information about your credit history.

For example, if you haven’t been meeting your financial obligations, the investigation will look into how actively you’ve tried to address the issues you’ve faced. That sort of nuanced information might require further scrutiny that includes asking you to answer additional questions or submit extra documentation.

But, obviously, the higher your credit score, the better the chances the reviewer will exercise some discretion if the investigation uncovers anything.

Why Security Clearances & Background Checks Are Needed

Some positions in the military involve access to information, technology, systems and facilities that relate to national security. The government needs to trust that people with security clearance jobs will keep that information from falling into the wrong hands.

A background check as part of the security clearance process is intended to reveal any vulnerabilities in a government employee in one of those positions. Does a candidate’s character or past conduct provide an opening for a third party to learn or obtain some of that sensitive information?

A need for money might be that opening.

“They’re looking at people who are susceptible to bribery and coercion,” Edmunds said. “People who are down and out, money-wise, and have clearances are more likely to let someone into secured spaces or give up secured classified information.”

Being granted a security clearance means you’ve been vetted against that possibility. It doesn’t automatically grant you access to specific classified information; it just means that you are eligible for access to it. Authorization for that access is usually determined on a “need to know” basis. In other words, do you need to know the information to do your job successfully?

There are three general levels of classified information in the military:

• Confidential: This is the lowest level of security clearance and the easiest to get. Access to classified information is low.
• Secret: This is level two, and it allows a cleared individual access to sensitive information.
• Top Secret: This is the hardest level to gain approval for, and there are far fewer jobs that require access to this level of clearance. Disclosure of information by someone with Top Secret clearance could cause exceptionally grave damage to national security.

The investigative and adjudicative process is the same for all three levels. Your credit and debt situation will carry the same weight regardless of whether you are applying for Confidential or Top Secret clearance.

Is Having Bad Credit a Disqualifier from a Security Clearance?

The list of SEAD 4 guidelines used in the background checks that determine whether you can be granted a security clearance includes finances, so bad credit can derail your application. It also can be a reason your existing clearance might be revoked.

In other words, the government is constantly checking your credit, even after you get security clearance. Under a 2018 policy initiative called Trusted Workforce 2.0, the government continuously monitors the backgrounds of federal employees, military personnel and service members who have security clearances.

Trusted Workforce 2.0, now administered by the Department of Defense, automatically collects information from a service member’s financial and criminal records, and even monitors social media data in certain circumstances.

“Time, current debt status, repayment evidence, willingness, ability, and individual circumstances are all considered,” said the spokesperson for the Defense Counterintelligence and Security Agency

Trusted Workforce 2.0 replaced a policy that mandated re-investigations of personnel with security clearances at various intervals, depending on the level of the clearance. A re-evaluation for Top Secret clearance occurred every five years, Secret clearance every 10 years and Confidential clearance every 15 years.

Here’s what Trusted Workforce 2.0 means to those who want security clearance or already have it:

• Initial vetting: Your background will be investigated when you apply for a new security clearance.
• Continuous vetting: Once you have the clearance, your financial health will be examined continuously.
• If you have a security clearance, you can be granted a Clearance Transfer, allowing you to move to a different agency.

The lesson: Constantly staying on top of your personal finances, including your credit, is critical to getting and to keeping your security clearance.

But remember: The person reviewing your eligibility has some discretion when it comes to your credit report. And chances are, the reviewer will be more inclined to exercise that discretion in your favor if he or she finds that you have been making good-faith efforts to address your financial difficulties. If you can prove you’re trying to pay your debts and make your payments on time, it can help.

“It’s a significant factor,” the Defense Counterintelligence and Security Agency spokesperson said.

For that reason, the person deciding your case won’t necessarily deny your clearance application just because you have a low credit score. There is no specific credit score needed for security clearance.

“It’s one component,” said Edmunds, whose law firm has been handling security clearance cases for more than three decades and has offices in six cities across the country. “You can have a low credit score if, say, you had cancer and had medical bills, or you got divorced. And because of things like that, the credit score went into the basement. But if you can show you’ve been working on it and you’re reformed and rehabilitated financially, you’ll do better. So, a credit score is an indication that there’s a problem, but it’s not the only criteria.”

If the investigation shows a pattern of financial irresponsibility and an unwillingness to try to fix the problem, that can be even more harmful to your chances than the credit report itself.

Among the financial considerations in your background that will negatively affect the decision on your security clearance eligibility are:

• Theft
• Embezzlement
• A history of unpaid debt
• A history of paying late
• Recent acquisitions of cash or assets beyond your means
• Financial trouble related to gambling
• Financial issues associated with substance abuse.

Does Bankruptcy Disqualify You From Getting a  Security Clearance?

If a candidate has a bankruptcy in his or her past, the background check will turn it up. As Edmunds said, “It indicates that you had a problem, so the government runs with that ball.”

That is, the investigation of your finances will scrutinize the reasons you declared the bankruptcy. Why? Because some reasons are more legitimate than others, and declaring bankruptcy can be a positive step to getting out of financial trouble. And candidates who are free of debt are less likely to compromise classified information.

“Bankruptcy is a legal remedy to solve debt problems,” Edmunds says, “so the government can’t nail you for filing a bankruptcy. But the bankruptcy is a red flag. It tells the government that at one time in your life, you either mismanaged your finances or you had serious problems that resulted in a bankruptcy. They dive into that to see what caused you to reach a point where you were unable to pay your bills. So, the bankruptcy in and of itself can’t be a disqualifier.”

If your financial problems were caused by external issues beyond your control – unexpected medical bills, the loss of a job, an economic downturn that negatively affected a business deal, etc. – then the adjudicator reviewing your case might

consider a bankruptcy declaration to be a good-faith effort to address the crisis.

But if the investigation determines that a bankruptcy became necessary for reasons of personal irresponsibility such as gambling, an expensive substance abuse habit or excessive and unnecessary spending, then it will work against your approval for a security clearance.

Can You Have Too Much Debt?

As with credit scores, there is no set amount of debt that can disqualify you from being granted a security clearance. None of the major branches of the military looks only at how much you owe in making a decision on your candidacy. The reviewer of your case tries to put that amount in context.

The operative term used as a reason to deny your application on those grounds is “excessive indebtedness,” which applies differently to each candidate’s finances. Because everyone has a different income with different assets, their debt loads presumably have different impacts on their ability to resist an overture to compromise classified information.

Perhaps a better way to evaluate being in debt as a factor in security clearance decisions is a candidate’s debt-to-income ratio, which is determined by dividing total monthly debt by monthly income (before taxes and other deductions are taken out) and multiplying the result by 100. If, for example, your monthly debt is $2,000 and monthly income is $4,000, the debt-to-income ratio is .5. You multiply by 100 and get 50%.

The government doesn’t establish a specific debt-to-income percentage that qualifies or disqualifies a candidate, either. But again, it can be an indication.

Generally, lenders in the financial world aren’t comfortable with a debt-to-income ratio higher than 43%, so that 50% ratio likely would be a red flag for a candidate applying for a security clearance. But before it contributes to a denial of the application, the reviewer will look at other factors, such as how long the debts have been carried and whether the candidate has been delinquent in making payments on them.

Can Your Taxes Affect Your Security Clearance?

The background check into your finances will include a look at your tax records, which military investigators will get directly from the Internal Revenue Service. “They don’t need your permission,”  Edmunds said.

The No. 1 consideration as they look over your records is whether you have failed to file your tax returns in a timely fashion. Occasional missed deadlines might not matter, especially if you can provide credible reasons for your delays. But a consistent pattern of late filings will raise concerns and be cause for further scrutiny.

Other mistakes on your returns that show up habitually can also cause problems for your candidacy. Generally, if you haven’t complied with every citizen’s obligation to pay taxes accurately and on time, the reviewer will want to know why. It may raise doubts about your future adherence to the security rules and obligations involved with protecting classified information.

Guideline: Financial Factors That Cause Concern

Federal security adjudicators use a series of 13 codified guideline categories listed in SEAD 4 to determine whether a candidate is granted a security clearance. They include, among others, evaluations of a candidate’s allegiance to the United States (Guideline A), his or her psychological conditions (Guideline I), criminal conduct (Guideline J), drug (Guideline H) or alcohol (Guideline G) consumption and whether he or she has divided loyalties or foreign financial interests (Guidelines B and C).

Of those 13, Guideline F – the one that deals with how a candidate manages money – is the most common stumbling block on the way to security clearance. As we’ve mentioned, financial mismanagement is the No. 1 reason people either are denied clearance or lose a clearance they’ve already been granted.

When people charged with protecting national security are desperate for fixes to their personal financial problems, the risk increases that they could trade their access to classified information or locations in exchange for money.

Here are some of the factors from Guideline F that can cause concern for military investigators and adjudicators evaluating the finances of candidates for security clearances:

• A history of not meeting financial obligations.
• Deceptive or illegal financial practices such as embezzlement, employee theft, check fraud, income-tax evasion, expense-account fraud, filing deceptive loan statements, and other intentional financial breaches of trust.
• Inability or unwillingness to satisfy debts.
• Unexplained affluence.
• Financial problems that are linked to gambling, drug abuse, alcoholism, or other issues of security concern.

Practical Solutions for Keeping Debt Under Control

Clearly, it’s advisable for any active-duty service member to have his or her finances in order in advance of starting the security clearance process. But if there are current problems, help can be found. Financial management assistance is available to personnel on most, if not all, military installations.

Military members can also seek debt management or financial advice on their own. It can start with a check of your credit score as you deal with debt that might impact your ability to get a security clearance. Don’t forget that being pro-active about addressing your money difficulties can play a positive role.

Other practical suggestions for when debt might be standing between you and a security clearance include:

• Seeking credit counseling from a nonprofit agency, especially if the company can negotiate lower interest rates and better payment terms for you. This recommendation is spelled out in SEAD 4 Guideline F as an approach that could mitigate security concerns.
• Documenting all the efforts you’ve made to manage the problem, including keeping a record of names, dates and whatever other particulars were involved.
• Preparing a budget that is a realistic review of your finances and consistently reduces your debt.
• Making at least the minimum payments to your creditors every month.
• Immediately disputing a mistake on your credit report.
• Notifying security officers or your immediate commander that you’re having financial problems and are seeking assistance to deal with them.