August 15, 2017, by Brooke Faulkner – Members of the military benefit from some financial protections, such as a limit on the amount of interest and fees a lender can charge as well as protections from lease cancellations, evictions, and repossessions. However, a survey by the National Foundation for Credit Counseling suggests that the average military family has about $500 more unsecured debt than the average civilian family, $11,000 less in tangible assets, and about $200 more in debt-related expenses per month.
Having poor credit or large amounts of debt can affect the level of security clearance available to you, possibly making you ineligible for your current position. Poor credit can even cause you to be discharged or denied enlistment outright. Here are some of the most common ways service members damage their credit as well as strategies for rebuilding credit.
Identify Why You Have Poor Credit
There are many reasons you might have bad credit. Identifying the cause will help you to adjust poor spending habits and reduce the amount of debt you accrue. To begin, you should order a credit report, which will list your current credit score, credit history, and may also include the main contributing factors to your credit. This information can give you a more specific direction for moving forward.
Many service members earn a steady paycheck, but the amount is barely enough to cover their monthly expenses, especially if they are supporting a family. This makes saving money particularly difficult, and in the case of an emergency, you might have to take out a loan in order to cover unexpected expenses.
The military lifestyle often requires moving to new locations on a regular basis. Aside from the fact that moving is expensive, frequent moves can make it difficult for your spouse to keep steady employment or advance within a company. The housing market can also make it difficult for you to sell your home quickly, which means you may have to pay mortgages on your old home in addition to your new home.
Whether it’s due to poor communication or simply forgetting, it’s also possible that your spouse will fail to make payments toward a particular balance while you are deployed. Even if it is a small bill, missing payments can result in late fees and interest, leading to more debt.
Because service members earn steady paychecks, you are more likely to be targeted by creditors who may encourage you to take out more debt than you can reasonably pay back. Service members are also frequently targeted by a variety of scammers who will offer high priced military loans with hidden fees, buyout plans for veteran’s benefits, and unnecessarily expensive life insurance policies.
The fact that you can lose your security clearance for accruing too much debt deters some service members from seeking help. However, hiding or avoiding your financial troubles will only prolong the amount of time it will take to pay down your debt and may significantly increase the total amount you have to pay, further damaging your credit.
Create a Budget and a Savings Account
It’s nearly impossible to build your credit if you aren’t tracking where your money goes. Budget templates exist and can give you a basic structure for tracking your spending habits, though you don’t need more than a pencil and paper to create a basic budget.
First, identify your income after any taxes and benefits are taken out. Overestimating the amount you make each month is an easy way to end up in debt. Then write down any fixed expenses, including car and house payments, insurance, and any other bills you can expect each month. Meeting your fixed financial needs first will help you to identify how much money you can spend on non-essential expenses or put into savings.
You should also list expenses that change from month to month, such as groceries, entertainment, and gas. These are areas where it may be possible to cut back. While you may be too busy to track your spending by hand, most banks will provide statements that can allow you to track your past expenses and identify any patterns.
It may be difficult to set aside any money after paying your bills each month. Yet even small contributions to a savings account can build toward a hefty sum over time. A savings account can provide you with financial security for unexpected expenses and will reduce the chance that you’ll suddenly need to take out another loan.
Use Credit Cards Wisely
Many people have credit cards, but few understand how to use them properly. Once you get into credit card debt, you may believe your best option is to close your account and cut up your card. In fact, closing an account can negatively impact your credit score and take away your means for financial recovery. If you are very intentional with your spending, it’s possible to use a credit card to rebuild your credit.
The best thing you can do is pay your balance on time every month. You should at least make the minimum required payment, but you don’t have to pay it all off. Allowing some of your balance to carry over to the next month could actually help build your credit score. If possible, make sure the revolving balance is no more than 30 percent of your total credit limit.
Secured credit cards are a safer option for people with poor credit. In order to use a secured credit card, you have to deposit your own money, usually $300 to $500, that serves as your credit limit. This money also functions as collateral for the lender if you happen to miss a payment. A secured credit card can allow you to build credit while ensuring you won’t slide deeper into debt.
Be Patient and Persistent
Rebuilding your credit will take time. Depending on your credit score when you begin the recovery process, making significant improvements to your credit could take months or even years. During this time, you’ll need to be diligent about meeting deadlines and making minimum payments as well as holding off on non-essential items you may have gotten used to buying on a regular basis. With a basic budget and careful attention to your spending habits, you can reduce your overall debt and improve your credit.
Author Bio: Brooke Faulkner is a mother of two and writer based in Portland, Oregon. She loves anything to do with historical nonfiction.