Credit Repair DIY Tips for Military Veterans
As a mortgage loan officer, I sometimes work with “credit challenged” customers – people with no credit history, a damaged credit history or too much debt relative to their incomes.
The bad news: having a bad (or no) credit score makes it hard to get a credit card, mortgage or auto loan. In some cases, it may even prompt employers to reject your job application.
The good news: with a little time and knowledge, there’s no credit problem that can’t be solved. The key is knowing: (A) which factors banks, credit unions and other financial institutions consider when deciding whether to make a loan; and (B) how to boost your creditworthiness. And I’m speaking not just as a financial professional but also from personal experience.
When it comes to credit and personal finance, nobody ever gave me advice what to do (and what not to do) when I was young. After graduating high school, I started collecting credit cards and maxing them out.
By the time I entered the Navy, I owed about $5,000 in credit card debt. This may not sound like much, but I was working for minimum wage, so it would have taken years to repay that debt. I soon fell behind on my payments and some of the accounts went into collection. If I hadn’t raised my income by joining the Navy, and then learned how to repair and maintain my credit, I wouldn’t be writing this article today.
How Lenders Judge Creditworthiness
Whether you want a mortgage, car loan, personal loan or credit card, it’s important to know how lenders evaluate creditworthiness. Although different lenders assign different weights to different criteria, many look at one (or both) of the following:
- Credit score, the most trusted of which is the FICO score. Because the FICO score reflects your credit history and current status, it’s usually the “go to” criterion for lenders. FICO scores range from 300 to 850. A score above 720 is considered “good” while one below 600 is “poor.” You typically need a score of at least 620 to qualify for a conventional mortgage.
- Debt-to-Income Ratio. Debt-to-Income ratio is the percentage of a consumer’s monthly gross income that goes toward paying debts. When you apply for a mortgage loan at BECU, your debt-to-income ratio must be below 43 percent. However, while prequalifying applicants, it’s not unusual to discover debt-to-income ratios of 50 percent. (For example, someone earning $5,000 a month, with $2,500 in monthly debt repayments, has a 50 percent debt-to-income ratio.)
When customers’ debt-to-income ratios are too high, I sometimes solve the problem by recommending they buy less expensive homes. In other cases, or when the person has no credit history or a bad credit score, the best approach is to start building or repairing the credit score.
Building a Better Credit Score During and After the Military
Apply for Credit: For people with no credit history, one straightforward solution is to apply for loans and credit cards. This is an especially good route for active service members. Many lenders, knowing that service members get regular paychecks, make it relatively easy for military personnel to obtain auto loans and credit cards.
Revolving and Installment Loans: To later qualify for a mortgage or another big loan, open at least three different credit accounts. Some should be revolving credit lines and others installment lines, which will prove you can handle both types of credit. In addition to getting credit cards (which are revolving credit lines), I recommend getting an auto loan or personal loan, which are installment loans. A history of repaying revolving and installment loans will give your credit score a big boost.
Secured Cards: For people with damaged credit scores (or no credit scores), I suggest applying for a secured credit card or secured personal loan. Many lenders offer these products.
A secured credit card works like a credit card. The only difference is that you deposit money as collateral and the lender doesn’t check your credit to qualify you. For example, you deposit $1,000 with your bank or credit union, which then gives you a card with a credit limit of $1,000.
Each transaction you make with the card begins building or repairing your credit score and, in some instances, you’ll earn interest on the money deposited with the lender. A secured personal loan works the same way, but it’s best for people who want or need a history of repaying installment loans.
Correct Errors on Your Credit Report
To improve, as well as maintain, a good credit score, it’s important to regularly check the credit reports about you issued by the “Big Three” credit reporting bureaus (Experian, TransUnion and Equifax) to ensure they contain no mistakes or “blemishes” that should have been removed. (Bad marks on your credit reports are supposed to be expunged after seven years.)
To stay current with the reports, I recommend annualcreditreport.com – a resource I’ve used myself. You receive all three credit reports for free each year, and if you see something you want to dispute, just email the credit bureaus. In my experience, they do an excellent job of quickly contacting lenders on your behalf to dispute errors and remove outdated information.
You can also contact a credit counseling service to assist you with repairing bad credit, but I do not recommend this approach. Although some of these firms are legitimate, many are nothing but scams. If you do a little homework, you can avoid the scams, as well as the fees charged by the legitimate companies.
Even a good credit counseling service isn’t going to do anything you can’t do yourself – for free. And you can’t beat that price.
Check Your Eligibility
If you’re not sure of your credit score, it’s worth checking your eligibility for a VA home loan. VA loans are lenient when it comes to less-than-perfect credit history.
See if you can buy a home with a VA loan. You might be surprised that you can.