The Lighthouse Program at Veterans United has helped tens of thousands of veterans and military buyers boost their credit and get their finances on the right track.
After nearly a decade of working one-on-one with veterans and their credit challenges, we’ve compiled a list of our top tips.
Whether your credit is on the mend or in near-perfect condition, these tips will make you a more knowledgeable consumer and help protect you from any inadvertent missteps.
Tip 1 – Don’t over use your credit cards
Thirty (30) percent of your credit score is derived from the utilization of available credit, meaning your balance in relation to your limit on a revolving account. Revolving accounts are typically credit cards, but can also be lines of credit or store charge accounts.
Even if the account is paid off in full each month this can still hurt scores. Creditors only report balances once a month, which is typically around the end of each billing cycle. If the report date falls when the account is at its highest, this could accidentally decrease scores. We recommend to avoid using the card like this, or pay it down before the report date.
Tip 2 – Optimal use on revolving credit is 10% utilization
For example, keeping a card with a $1,000 limit with less than a $100 balance. We advise one charge of roughly $10 to $50 each month to keep any revolving account active as you build scores. If your credit rating is already over 740 this isn’t necessary so long as you have activity in the last six months.
Tip 3 – Going over 50 percent utilization will decrease scores
For example, you can run into problems if your balance exceeds $500 on a card with a $1,000 limit. Statistically, credit profiles with high or maxed out revolving credit accounts month to month are more at risk of default. The credit bureaus decrease credit scores to reflect that statistical risk. Simply put, keep card balances low at all times.
Tip 4 – $1 balance is usually better than $0
Odd, we know, but a small balance usually keeps scores higher than $0 balance on revolving credit accounts. This rule of thumb is best used as a means to build credit until a certain point. If credit scores increase into the 700s, it’s fine to pay off a credit card so long as the account stays open and gets used a few months into the future.
Tip 5 – Don’t close credit cards to improve your credit score
It’s understandable to want to close an account if there’s a yearly fee, or if the card is just too tempting to use. Be warned, though, that closing a credit card can decrease your credit rating in most cases. This is because it will decrease the total amount of available credit, as well as the length of credit history, both factors in credit scoring formulas.
Tip 6 – Getting a new loan doesn’t help your scores
Actually, a new loan can decrease scores anywhere from five to 15 points in the first few months it appears on the credit report. Scores usually rebound after the six-month mark, with most upward movement occurring after a year. In the same thread, paying off a loan doesn’t typically help scores, either. Unfortunately, there are no bonus points for paying the note off early. New loans also represent new liabilities and can impact your home loan application as well. An increase of roughly $70/month in debt obligations could decrease your preapproval amount by $10,000, depending on your specific situation.
Tip 7 – Make payments on time, every time
This also means making the full payment due. Paying less than the amount due can cause a payment to be marked late, which could drop your score by as much as 100 points.
Tip 8 – Be proactive on outstanding bill notices
Whether from an old cable company, cell phone provider, doctor’s office or any other company, get in front of the issue and resolve it as soon as possible. If the bill turns into a collection and isn’t addressed before appearing on the report, credit scores could decrease anywhere from 50 to 100 points. Mortgage lenders will often have a cap on how much a potential borrower can have in collections and still be able to obtain a home loan.
These tried-and-true methods can help most consumers build and strengthen their credit. Every consumer’s situation is different, but taking these simple, concrete steps can make a big difference for veterans and military buyers.