Security Clearances: How To Keep Your Credit Report Clean

Pay Your Bills On Time

The first step is simply to pay your bills on time. This one seems the easiest, but it can be hard, especially when you are deployed or moving or whatever. Two keys to paying your bills on time are to automate and simplify everything.

There are a couple of different ways to automate your bills. I put everything that must be paid, like utilities and loan payments, on auto-payment. I’ve set them to debit on payday, so there’s no chance that the money won’t be in the account. For things like credit cards, I have auto-payment set up for only the minimum payment. I go in and manually pay them in full each month, but having the minimum payment paid by auto-pay ensures that I won’t accidentally pay late if something chaotic happens in my life.

Another way to automate, which is a little riskier, is to have your bills paid by credit card each month. With this method, you don’t have to worry about having enough money in your bank account, but you run the risk of accruing a balance on your credit card. Also, most credit cards won’t let you pay with another credit card.

In addition to automating, have some system for making sure each bill gets paid each month. I have a very simple list in my planner that says, “mortgage, water, electric, gas, cable, cell phone, NFCU Visa, insurance, USAA Visa, Amex.” Once or twice a month, I quickly check that everything has been paid. It isn’t completely necessary, because everything is set to pay automatically (except my darn water bill,) but I appreciate the security of checking.

Over time, simplify by closing your unused credit accounts so there is less to track. If appropriate, consolidate random bank accounts that may have accumulated. (Unless those extra bank accounts are part of your financial organization.) In general, find the easiest way to do whatever needs to be done. Easy means less room for mistakes.

Don’t Get Over-Extended

Two of the criteria mentioned in the CFPB announcement are “being in excessive debt, or having a high debt-to-income ratio.” Unfortunately, it doesn’t define excessive or high, so we’ll have to make an educated guess about what they’ll want.

First, you need to know what debt-to-income (DTI) ratio means. Your DTI is a measure of how much you owe each month compared to how much you earn. To calculate your debt-to-income ratio, add up all your monthly bills, including:

• rent or mortgage payment
• car loan(s)
• student loan(s)
• any other loan(s)
• credit card payments (use the minimum payment)
• child support and/or alimony
• any other monthly debt payment

Do not include expenses like groceries, utilities, gas, child care, and taxes. Then divide your monthly debt payments by your gross (before taxes) monthly income. This gives you your DTI. (You can also use a calculator like this one.)

Is My DTI Good?

Now, is your DTI considered good? Many objective sources use “no more than 35%” as their “good” debt-to-income ratio. I’d like folks to be lower, even much lower, but I’m thinking less than 35% is a decent standard.

If your DTI is more than 35%, you definitely need to be taking proactive steps to lower that amount. While you can technically change this number by either paying off debt or increasing your income, for this purpose we want to focus on paying off debt. Examine your budget for places you can cut back and redirect that money towards debt, or perhaps find some extra income to put towards the debt. Take advantage of the financial educators available at your installation’s family service center if you need help figuring out how to do it.

If your DTI is less than 35%, you still have to be careful. Avoid taking on new debt whenever possible, and when you do take on new debt, pay it down quickly. You want to have some extra room in your DTI for things that might come up: a broken AC when you don’t have enough money in your house repair fund, or a broken car when your car replacement fund isn’t quite up to snuff. While the ideal is to have no debt, that isn’t always possible.

Review and Protect Your Credit Report

You can get a free credit report from each of the three major credit bureaus once a year. This link, annualcreditreport.com, is the official place to get your free credit reports, though you can also access them through websites like CreditKarma and CreditSesame. (I’m not recommending either one, as I haven’t used them enough to review them properly.) One good strategy is to check one bureau every four months, so that you’re constantly monitoring the situation.

You can also use the credit score services offered by most major credit cards. USAA, Navy Federal Credit Union, and PenFed Credit Union are among the many credit card issuers who offer free credit scores with your online access. Each one may use a different scoring system, so you aren’t necessarily looking at the exact number, but rather making sure it stays consistent. If your score suddenly drops, and you don’t know why, then it is definitely time to investigate.

If you find errors on your credit report, contact the reporting agency and dispute the errors. Sometimes, this is quick and simple; other times, it can be a long, drawn-out battle. Either way, you need your report to be accurate.

One way to prevent errors and identity theft is to freeze your credit. Effective 21 September 2018, freezing and unfreezing your credit will be free for everyone, all the time, regardless of where you live. Even better, within 1 year, all credit agencies must offer free electronic credit monitoring for all active duty service members.

Obviously, each of these steps has a couple of different parts, but it is easier to remember just the three main steps: pay your bills on time, keep your debt small, and review and protect your credit report. If you do these three things, you won’t have to worry what will be found during any review of your financial situation.