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Posted on Jan 5, 2018
What advice do you have for someone looking to improve their credit score?
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I have a year or so until I graduate with my BA and begin my dream job. That being said, I would like to begin planning to buy my first house after I find where I will be working. In the mean time, I need to begin working to improve my credit. Like many young enlisted Soldiers, I made numerous bad decisions that led to my credit taking many hits. What kinds of things can I do at this point in order to improve my credit now in the hopes of being approved for my VA Home loan in a little over a year? If it takes a little longer, then that is fine. Just looking for information.
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Planning
Posted 8 y ago
Responses: 9
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I know it's been mentioned before, but the two easiest things you can do to boost your credit are pay your bills on time and get a credit card that you use for every day expenses - gas, food, etc. that you pay off entirely each month. If you don't have the money for whatever it is you're trying to buy, don't use your credit card. If you pay it off completely each month you'll never pay interest and you'll slowly build your credit. I've been doing this for years and I was able to buy a house with a VA loan and my credit score is damn near 800 now. It works.
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Lots of free info on the net, but at a bare minimum pay early and extra on any credit card(s) you may have. A 6 month to 1 year period of that on every account will help your credit. Get a free credit report and you will then know what you are dealing with. Some find things on their report that are erroneous, so check that and correct any that apply. It's good to understand the things that determine your FICO score and work them to maximize the effect. If you have many accounts, consider combining them so you only have one credit payment to focus on. You can do that by finding a new card that has zero fees to transfer balances to, a good % rate, and no annual fee. Then transfer all totals to the new card. You can use an existing card but unless it has free transfer you will have a lot of fees. Credit utilization factors into FICO, so you don't want to exceed the 30% threshold to help your score (example - $300 balance on a $1000 credit limit). The number of accounts you have is also a factor of FICO score so look before you leap to a new card. How long you have had your accounts also factor into FICO, so don't close accounts without looking at the impact first. Start by understanding FICO and go from there. After that, a year of steady and timely payments can make a lot of difference. I know a young professional that went from FICO of mid 500 range to mid 700s in approx. 1.5 years by doing these things. There are more factors but the main ones are age of accounts, utilization rate, number of accounts, and payment history. See bottom link. Good luck.
https://www.myfico.com/
https://www.creditcards.com/top-credit-cards.php
https://www.creditcards.com/credit-card-news/help/5-parts-components-fico-credit-score-6000.php
https://www.myfico.com/
https://www.creditcards.com/top-credit-cards.php
https://www.creditcards.com/credit-card-news/help/5-parts-components-fico-credit-score-6000.php
Get Your FICO Scores, The Credit Score Used by Lenders | myFICO
myFICO’s Credit Report & Credit Monitoring Products Contain FICO Scores, used by 90% of Lenders.
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Pay your bills on time. Don't apply for a bunch of different credit all at once that you don't need. Have a credit card that is paid off every month if used. Don't get more credit then you can't manage. Save for a good down payment and have extra cash flow that you put into savings before you think about buying a house. Make sure that you keep some money away that you can get to if you need it.
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Record every dollar you spend for at least 1 month
Decide where you might be spending money on things you don't need or receive any benefit from
Develop a budget allowing for necessary expenses (food, clothing, shelter, transportation, taxes), savings, charitable giving, paying off credit cards and other unsecured debt, and a little fun
Follow the budget as closely as possible
Get at least 3 months of necessary expenses in savings, more if you can
Pay off the credit cards and close the accounts
If you're married, include your spouse in every step listed above. This has to be a team effort or it won't work. If you are cohabitating, try the team approach; however, keep finances separate so you keep control of your credit score.
Good personal accounting software helps a lot. Makes things like balancing a checkbook easy. I recommend Quicken, but there are other products on the market that work as well.
Decide where you might be spending money on things you don't need or receive any benefit from
Develop a budget allowing for necessary expenses (food, clothing, shelter, transportation, taxes), savings, charitable giving, paying off credit cards and other unsecured debt, and a little fun
Follow the budget as closely as possible
Get at least 3 months of necessary expenses in savings, more if you can
Pay off the credit cards and close the accounts
If you're married, include your spouse in every step listed above. This has to be a team effort or it won't work. If you are cohabitating, try the team approach; however, keep finances separate so you keep control of your credit score.
Good personal accounting software helps a lot. Makes things like balancing a checkbook easy. I recommend Quicken, but there are other products on the market that work as well.
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There's a big difference between the stuff you want and the stuff you need - know the difference. Pay your bills on time. If you get in trouble, talk to the people you owe, most will work with you. Keep away from the plastic, if you ain't got the money you probably don't need it.. Learn to eat in, cook and pack a lunch. Walking never hurt, nor does riding a bike.
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Some banks will allow you to build your credit score up slowly. A certain amount of credit is authorized as long as you keep a small balance to cover the amount of credit they authorize for you. Building up a bad credit rating is a difficult process but it can be done. Please keep in mind the advice by SSG Matthew and PO2 Eric K.
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Suspended Profile
Several folks have chimed in with really, really solid information here. At this time, I would only like to contribute by reminding you, in regard to debt, you must strategize. The usual strategy is to gather information on all of your consumer debt (i.e. credit cards), keep a spreadsheet on your payments/terms/annual costs/etc., and resolve to pay down the cards with the higher interest rates first (while not using them). This may take a while and is not necessarily feasible for some folks, depending on individual income levels. Take it from me, it can be a major pain in ass, but you won't need to pay the debt all off entirely before applying for the home loan or anything. The VA (and associate lenders) want to see an established track record of paying down debt, but also active reductions in higher interest debt first; the quicker you do this, the more responsible and informed you will appear on your credit reports. The banks have analysts that want to establish a trend (i.e. trend analysis) to ensure that you are serious about a home purchase and that you are doing your "due diligence" to get yourself ready for loan repayments when the time comes. That said, scan your credit reports post-haste and really take a long hard look. It can take over 6 months to get certain issues removed from those reports.....sometimes weird mistakes are made - like, say, if one of your parents made a screwy mistake and used your SSN to apply for a loan. While denied, well, the credit bureau folks get busy with other stuff and can't audit every last report on the reg. Oh, and Equifax got hacked, so there is that. Seriously, go over those reports with a fine comb.
I agree to a point with "using your credit cards like debit cards" to effectuate positive changes on your credit report, but - as was mentioned - that can be a slippery slope. I doubt you are going to go willy-nilly buying random goods/services, but in the event you use a CC and it gets stolen/cloned, you may be insured against losses, but I don't think the process is that simple when cleaning up the credit dings - at least not right away; it can be quite time-consuming. As far as risk to your check card for daily purchases, it may not boost your credit score per se, however, I'm writing while assuming that you are paying down debt, monitoring your credit report and FICOs, etc. If you have your main accounts with a responsible bank (I like USAA, personally), they have contact representatives that monitor for fraudulent activity and can shut down the card, plus remit a new one to you with a new number in a few business days (you can expedite/overnight the card for a few bucks and can always write a check at a bank for cash, just make sure to get your bank rep on the phone to temporarily life the freeze on the account and approve the cash transfer & disbursement). There is a saying in finance usually reserved for investments: 'don't put all your eggs in one basket'. Spread your money around - maybe put excess cash in a savings account you don't use regularly or perhaps put it in a money market account to earn some extra cash. You can then transfer the cash to your checking for purchases or debt repayment while not exposing the acct information to various merchants, online or otherwise. And, not that you would, but avoid unknown or obscure ATMs and check the card swipes when you get gas (if they are loose, don't use them).
Regarding the VA, I believe they will provide a list of lenders that have been vetted and with whom they have established working relationships, in order to aid your decision making and personal assessment as to whether you feel ready to buy a home, yourself. I do not personally have intimate knowledge of the process, but if you can get access to terms, read them thoroughly and document all questions/answers. What I would do is locate someone whom has used the VA home loan before more than once (I used to field questions to an E-7 I worked under back at NIOC) and just pick their brain over a beer/coffee. These folks LOVE to talk about the ins and outs because it can be tedious and the conversation gives them a chance to recall stories about problems they ran into (and strokes of luck, as well). There are random small details that can have significant consequences and folks who've used the loan before are a treasure trove! In any case, I hope it works out for you. Congratulations on the degree and good luck to you!
I agree to a point with "using your credit cards like debit cards" to effectuate positive changes on your credit report, but - as was mentioned - that can be a slippery slope. I doubt you are going to go willy-nilly buying random goods/services, but in the event you use a CC and it gets stolen/cloned, you may be insured against losses, but I don't think the process is that simple when cleaning up the credit dings - at least not right away; it can be quite time-consuming. As far as risk to your check card for daily purchases, it may not boost your credit score per se, however, I'm writing while assuming that you are paying down debt, monitoring your credit report and FICOs, etc. If you have your main accounts with a responsible bank (I like USAA, personally), they have contact representatives that monitor for fraudulent activity and can shut down the card, plus remit a new one to you with a new number in a few business days (you can expedite/overnight the card for a few bucks and can always write a check at a bank for cash, just make sure to get your bank rep on the phone to temporarily life the freeze on the account and approve the cash transfer & disbursement). There is a saying in finance usually reserved for investments: 'don't put all your eggs in one basket'. Spread your money around - maybe put excess cash in a savings account you don't use regularly or perhaps put it in a money market account to earn some extra cash. You can then transfer the cash to your checking for purchases or debt repayment while not exposing the acct information to various merchants, online or otherwise. And, not that you would, but avoid unknown or obscure ATMs and check the card swipes when you get gas (if they are loose, don't use them).
Regarding the VA, I believe they will provide a list of lenders that have been vetted and with whom they have established working relationships, in order to aid your decision making and personal assessment as to whether you feel ready to buy a home, yourself. I do not personally have intimate knowledge of the process, but if you can get access to terms, read them thoroughly and document all questions/answers. What I would do is locate someone whom has used the VA home loan before more than once (I used to field questions to an E-7 I worked under back at NIOC) and just pick their brain over a beer/coffee. These folks LOVE to talk about the ins and outs because it can be tedious and the conversation gives them a chance to recall stories about problems they ran into (and strokes of luck, as well). There are random small details that can have significant consequences and folks who've used the loan before are a treasure trove! In any case, I hope it works out for you. Congratulations on the degree and good luck to you!
CPO (Join to see)
Depending on the amount of excess cash we are talking about, instead of a traditional savings account, consider higher interest bearing accounts like Certificates of Deposit (CD). CDs often require a minimum deposit or minimum duration so pick the CD terms that best fits your situation while maximizing your returns and not trapping your money.
You might also consider a tiered approach. Instead of throwing everything in one CD all at once, maybe divide the balance by 12 and open a new CD each month or some other strategy that lets you benefit from the higher interest rates without locking down your entire cash reserve all at once.
At one time I was rotating a large amount of cash through multiple 7-day CDs. I was in the middle of a big purchase and was unsure when it would get a green light. I wanted more than 0.01% interest on my money while I negotiated and waited, but needed the money to be available within a week for when the deal closed. The 7 day CD automatically rolled over into another 7-day CD until it was time to move my money...
You might also consider a tiered approach. Instead of throwing everything in one CD all at once, maybe divide the balance by 12 and open a new CD each month or some other strategy that lets you benefit from the higher interest rates without locking down your entire cash reserve all at once.
At one time I was rotating a large amount of cash through multiple 7-day CDs. I was in the middle of a big purchase and was unsure when it would get a green light. I wanted more than 0.01% interest on my money while I negotiated and waited, but needed the money to be available within a week for when the deal closed. The 7 day CD automatically rolled over into another 7-day CD until it was time to move my money...
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STOP USING YOUR DEBIT CARD!!! Instead, use your credit card like a debit card. Meaning, if you do not have the money available in your checking account to pay the bill in full at the end of the month then do not spend money on your credit card. Debit cards are a terrible deal for consumers but great profits for the banks. If you use your credit card properly then you will be the one to profit.
The banks only report bad behavior with debit cards so they can never improve your credit score but they can still harm your credit score. Credit cards report both good and bad so responsible use will improve your credit score. All that protects a debit card is bank policy (subject to change at any time). Credit cards are protected by federal law. Identity theft with a debit card can cost you more than everything in your bank account. By law, the most you are liable with a compromised credit card is $50 total.
If you are an impulse buyer and cannot control yourself then just set all your regular bills (phone, utilities, insurance, Netflix, storage, etc.) on auto-pay to your credit card and then store the card at home in a manner that prevents easy access. Do not save your credit card info in your web browser or in any merchant websites (i.e. Amazon, eBay, Home Depot, wherever you buy crap). This both cuts down on impulse buys and reduces the risk of identity theft when a merchant gets hacked or you visit the wrong site.
The credit limit on your credit card adds to your available credit. The ratio of debt to available credit is a factor that determines your credit score. The more credit you have available, the higher your credit score tends to be. The age of your account also improves your credit score (new account give slight ding while older account adds extra) Debit cards can't help with either of these factors.
Most credit cards include buyer protection plans that may protect the purchase, facilitate returns, extend the warranty, offer misc insurance coverage. For instance buying a plane ticket with a credit card often gets you travel insurance for your flight or paying your cell phone bill might give you damage insurance on your phone.
When you buy with a debit card, your money is instantly taken from your checking account and you must fight to get your money back if there is a dispute or over charge. With a credit card you pay nothing on a disputed charge until the dispute is resolved. If the item you purchase/rent requires a deposit, additional funds could be frozen and unavailable to you. If you use a credit card, that freeze is applied against your available credit. If you use a debit card that freeze is applied to the money in your checking account you might need to pay other bills. Renting a car with a debit card will instantly remove the cost of the rental from your account and security freeze/hold on an additional $500 to $2,000 depending on the car rented.
The banks only report bad behavior with debit cards so they can never improve your credit score but they can still harm your credit score. Credit cards report both good and bad so responsible use will improve your credit score. All that protects a debit card is bank policy (subject to change at any time). Credit cards are protected by federal law. Identity theft with a debit card can cost you more than everything in your bank account. By law, the most you are liable with a compromised credit card is $50 total.
If you are an impulse buyer and cannot control yourself then just set all your regular bills (phone, utilities, insurance, Netflix, storage, etc.) on auto-pay to your credit card and then store the card at home in a manner that prevents easy access. Do not save your credit card info in your web browser or in any merchant websites (i.e. Amazon, eBay, Home Depot, wherever you buy crap). This both cuts down on impulse buys and reduces the risk of identity theft when a merchant gets hacked or you visit the wrong site.
The credit limit on your credit card adds to your available credit. The ratio of debt to available credit is a factor that determines your credit score. The more credit you have available, the higher your credit score tends to be. The age of your account also improves your credit score (new account give slight ding while older account adds extra) Debit cards can't help with either of these factors.
Most credit cards include buyer protection plans that may protect the purchase, facilitate returns, extend the warranty, offer misc insurance coverage. For instance buying a plane ticket with a credit card often gets you travel insurance for your flight or paying your cell phone bill might give you damage insurance on your phone.
When you buy with a debit card, your money is instantly taken from your checking account and you must fight to get your money back if there is a dispute or over charge. With a credit card you pay nothing on a disputed charge until the dispute is resolved. If the item you purchase/rent requires a deposit, additional funds could be frozen and unavailable to you. If you use a credit card, that freeze is applied against your available credit. If you use a debit card that freeze is applied to the money in your checking account you might need to pay other bills. Renting a car with a debit card will instantly remove the cost of the rental from your account and security freeze/hold on an additional $500 to $2,000 depending on the car rented.
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CPO (Join to see)
() If you do not have a credit card apply for a credit card or two.
() Avoid credit cards with annual fees just for having the card unless you know you will benefit from the membership services. (Typical middle class users don't benefit)
() Avoid carrying a balance
() A low interest rate is important if you plan to carry a balance. If you carry a large balance, this is where paying a small annual fee for an extra low interest rate makes sense. Just make sure you save more interest charges than the cost of the annual fee.
() The interest rate is not as important if you pay your bill in full each month
() Unfortunately most credit card review sites to help you pick the best card are complete BS. Often crappy credit cards pay for the best position on a lot of those websites.
() Consider a cash back credit card over a points or points-to-cash credit card. Cash is always cash but points can be devalued with a change in company policy.
() Some travel rewards programs offer much bigger rewards with points over cash back. If you are actually going to use the program to travel within the annual time limits, the points could be worth 10:1 over cash back. Most people cannot actually take full advantage of the points, and frequently lose out on all rewards so IMHO cash back is better for most people.
() Consider a military friendly financial institution over a big name bank. A local credit union often has much better products than the big name banks. I primarily use USAA and Navy FCU but I have accounts with other institutions too.
() Do not think you have to work with just one financial institution. Instead of putting all your eggs in one basket, consider an 'a la carte' selection of financial products. When I have a financial need, I will select the best product on the market even if it is with a different company. I am not restricted to just the services/rates that "my bank" provides.
() Most of the big name banks have a record of criminal activity. Why do business with them? (Wells Fargo, Bank of America, CitiBank, HBC, JP Morgan Chase, Goldman Sachs, Capital One, etc.)
() Do not close old credit card accounts even if you do not use the card any more. The age of the account and available credit both help improve your credit score. Closing an old account with give two blows to your credit score. Just set the card aside and stop using it instead of closing the account.
() Pay you bill in full every month. "Carrying a balance" or only making a partial payment does *not* improve your credit score faster. All that does is result in finance charges and interest payments.
() Minimum payments are for suckers. If you cannot pay the bill in full each month, pay as much as you can as soon as you can on any outstanding balance past the original due date. The only time a minimum payment is useful is to avoid a late fee or delinquent status.
() Avoid credit cards with annual fees just for having the card unless you know you will benefit from the membership services. (Typical middle class users don't benefit)
() Avoid carrying a balance
() A low interest rate is important if you plan to carry a balance. If you carry a large balance, this is where paying a small annual fee for an extra low interest rate makes sense. Just make sure you save more interest charges than the cost of the annual fee.
() The interest rate is not as important if you pay your bill in full each month
() Unfortunately most credit card review sites to help you pick the best card are complete BS. Often crappy credit cards pay for the best position on a lot of those websites.
() Consider a cash back credit card over a points or points-to-cash credit card. Cash is always cash but points can be devalued with a change in company policy.
() Some travel rewards programs offer much bigger rewards with points over cash back. If you are actually going to use the program to travel within the annual time limits, the points could be worth 10:1 over cash back. Most people cannot actually take full advantage of the points, and frequently lose out on all rewards so IMHO cash back is better for most people.
() Consider a military friendly financial institution over a big name bank. A local credit union often has much better products than the big name banks. I primarily use USAA and Navy FCU but I have accounts with other institutions too.
() Do not think you have to work with just one financial institution. Instead of putting all your eggs in one basket, consider an 'a la carte' selection of financial products. When I have a financial need, I will select the best product on the market even if it is with a different company. I am not restricted to just the services/rates that "my bank" provides.
() Most of the big name banks have a record of criminal activity. Why do business with them? (Wells Fargo, Bank of America, CitiBank, HBC, JP Morgan Chase, Goldman Sachs, Capital One, etc.)
() Do not close old credit card accounts even if you do not use the card any more. The age of the account and available credit both help improve your credit score. Closing an old account with give two blows to your credit score. Just set the card aside and stop using it instead of closing the account.
() Pay you bill in full every month. "Carrying a balance" or only making a partial payment does *not* improve your credit score faster. All that does is result in finance charges and interest payments.
() Minimum payments are for suckers. If you cannot pay the bill in full each month, pay as much as you can as soon as you can on any outstanding balance past the original due date. The only time a minimum payment is useful is to avoid a late fee or delinquent status.
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CPO (Join to see)
() Live BELOW your means. Do *not* try to keep up with the Jones. Very few occupations require you to "maintain an image" of having more to get more.
() Know the difference between "I need" and "I want". Your "needs" are very few.
() The problem is not how much you make; the problem is how much you spend.
() Pay yourself first. Budget an amount that goes to you and your goals first, then pay your bills, then the money left over is for discretionary spending on the "I need" and "I want" items.
() Give yourself a raise when your employer gives you a raise. Increase your savings percentage when your pay increases (annual increase, promotion increase, years of service increase, deployments). That new money should go towards retirement, financial goals, and eliminating existing debt before any of it is spent on improving your lifestyle or buying more "I wants".
() Take advantage of opportunities to improve your financial situation. Boot camp, schools, and deployments are great opportunities where many expenses are reduced or eliminated. The extra pay and tax savings during deployment should not be squandered.
() Companies will pay you extra money when you have money and everyone with charge you additional fees when you do not have money.
() Have tiered goals (i.e. 1 year, 5 year, 10 year, age 60) Plan and save for known expenses and goals instead of always improvising from "crisis" to crisis. New tires for the car should rarely be a crisis. Wedding. Down payment on home. New roof. Kids school. Braces.
() Life is much less stressful when you know you have F.U. money collecting interest. Far too many people make themselves slaves to their jobs and always dependent on the next paycheck. Put yourself in the financial position where you could walk away from any job without worry.
() Don't fall for marketing and popular culture. Many "traditions" are marketing campaigns to separate you from your money. You do not need to spend a fortune or go into debt on a social gathering or event wardrobe. (i.e. 1st birthday, Communion, Bar Mitzvah quinceanera, sweet 16, promposal. prom, graduation, proposal, wedding, Halloween, Super Bowl, etc.) Many so called "traditions" are linked more to post WWII advertising than actual customs. Know the difference between "median price" and "average price". In an effort to get you to spend more, median prices are well guarded while average prices are highly hyped. Happiness is not a competition but materialism is very competitive.
() Know the difference between "I need" and "I want". Your "needs" are very few.
() The problem is not how much you make; the problem is how much you spend.
() Pay yourself first. Budget an amount that goes to you and your goals first, then pay your bills, then the money left over is for discretionary spending on the "I need" and "I want" items.
() Give yourself a raise when your employer gives you a raise. Increase your savings percentage when your pay increases (annual increase, promotion increase, years of service increase, deployments). That new money should go towards retirement, financial goals, and eliminating existing debt before any of it is spent on improving your lifestyle or buying more "I wants".
() Take advantage of opportunities to improve your financial situation. Boot camp, schools, and deployments are great opportunities where many expenses are reduced or eliminated. The extra pay and tax savings during deployment should not be squandered.
() Companies will pay you extra money when you have money and everyone with charge you additional fees when you do not have money.
() Have tiered goals (i.e. 1 year, 5 year, 10 year, age 60) Plan and save for known expenses and goals instead of always improvising from "crisis" to crisis. New tires for the car should rarely be a crisis. Wedding. Down payment on home. New roof. Kids school. Braces.
() Life is much less stressful when you know you have F.U. money collecting interest. Far too many people make themselves slaves to their jobs and always dependent on the next paycheck. Put yourself in the financial position where you could walk away from any job without worry.
() Don't fall for marketing and popular culture. Many "traditions" are marketing campaigns to separate you from your money. You do not need to spend a fortune or go into debt on a social gathering or event wardrobe. (i.e. 1st birthday, Communion, Bar Mitzvah quinceanera, sweet 16, promposal. prom, graduation, proposal, wedding, Halloween, Super Bowl, etc.) Many so called "traditions" are linked more to post WWII advertising than actual customs. Know the difference between "median price" and "average price". In an effort to get you to spend more, median prices are well guarded while average prices are highly hyped. Happiness is not a competition but materialism is very competitive.
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