The Military Wallet» Credit / Debt

How to Improve Your Credit Score

Ryan — Fri, 02 Jul 2010 15:36:35 +0000

Do You know what is considered a good credit score?

Your credit score is used by lenders to determine whether or not they want to risk lending you money. It’s also used by some employers when they’re deciding who to hire; landlords who are looking for tenants; and even the calculation of your car insurance premiums. Because your credit score is so important to your financial well being, you should try to improve your credit score to receive the best interest rates when you borrow money, improve your chances of getting hired and keep your car insurance premiums as low as possible.

How to Improve Your Credit Score

Credit scores are calculated using a number of factors including your payment history, amount owed, types of credit you have, and length of time of your credit history. Here is a graphical representation of how your credit score is determined:

FICO Credit Score Breakdown

There are no quick fixes to improving a low credit score, but the following tips will help you raise your score over time:

Payment History

Obviously, the best way to improve or keep a good credit score is to pay all of your bills on time, all the time. Each time you make a payment late or enter into collections, your FICO score is impacted negatively and the result is a lower score than you’d like.

If you already have accounts that are late, get them paid on time and try to keep them current. The more months in a row you can pay all of your bills on time, the higher your credit score will be.

If you have an account in collections, paying it off will not remove it from your credit report. Collection accounts and bankruptcy data stay on your credit report, and impact your credit score for seven years.

Amount of Money You Owe

The rule of thumb is to keep your balances within 30% of your credit limit. If you have credit cards that you owe as much as you’re allowed to borrow, it impacts your score negatively. If you have cards with balances that are almost as much as your credit limit or higher, focus on paying that debt down first.

Don’t close credit card accounts that are paid off or not being used because it reduces the amount of your available credit. When you have less credit available, the amount of debt you have compared to the amount available increases, and lowers your credit score. On the flip side, it’s not a good idea to go out and open a ton of new credit cards to increase your available credit, either.

Length of Credit History

How long you have been managing credit also plays a role in the calculation of your credit score. The more new credit accounts you have, the lower your average account age is, which will affect your score more than if you have several older credit accounts. Opening several new credit accounts in a short period of time will lower your score, because it signals you are higher risk than someone who hasn’t needed to borrow money.

If you need to apply for credit, like for a car loan, apply to multiple places within a few days time. The FICO score can distinguish between searching for several different types of credit lines compared to searching for the best rate on a single loan.

Types of Credit

Having a good mix of credit types is ideal, but opening new types of credit just to improve your variety of credit types probably won’t result in a higher credit score. It’s just that someone who has a mortgage, a credit card and a car loan would look less risky than someone who had 4 credit card accounts on their credit report. Having no credit at all is seen as risky when you decide to try and borrow money, because the lender has no way of knowing whether you can make your payments on time or not.

How to check your credit score for free

You can monitor your credit score to see if it is improving. The federal government mandates the Credit Bureaus give you a free copy of your credit report once per year, but they do not require them to offer you a free copy of your credit score (see difference between credit report and credit score). Here is how to get your Free FICO Credit Score. You may have to sign up for a free trial, which you can cancel before you are charged any money.

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How to Use a Credit Card to Build Your Credit Score

Ryan — Fri, 19 Feb 2010 16:13:38 +0000

My first experience building credit was with a credit card that I opened while I was attending college. Thankfully, I avoided the classic college mistake of maxing out the card in the first month of ownership, then living with debt for the next 10 years. My goal was to apply for the credit card, make a several hundred dollar purchase, then pay off the loan over a couple months to prove I was capable of making regular payments. I paid a few dollars in interest charges over the time I made those payments, but in my opinion, a few dollars in finance charges was well worth building my credit history and credit score.

It has been well over ten years since I opened my first credit card and I haven’t made a finance charge on a credit card since then. That experience and several other successful loans since then have helped me build a high credit score and a favorable credit history.

Using credit cards to build credit history and credit score

Credit cards aren’t the only way to establish your credit history, but they are usually the easiest way to create a credit history because it is usually easier to open a credit card than other forms of credit such as a car loan or mortgage (lenders are less likely to lend that much money to someone who doesn’t have any credit history).

Once you have established a line of credit, your actions are reported to the credit bureaus which begin recording your credit history on your credit report. Over time, your actions will be used to determine your credit score. Here is more information about the difference between credit report and credit score.

No credit or poor credit? If you are having trouble getting approved for a credit card, then you should check out secured credit cards, which require a deposit and sometimes come with an annual fee. The deposit works as collateral for your charges and if you don’t make on time payments, the bank will use your deposit to pay your charges. Secured credit cards cost a little more than traditional credit cards, but they often come with guaranteed approval and with proper use will help you improve your credit score. After proving your ability to make payments, you can often upgrade your secured credit card to a non-secured card that has a better interest rate and doesn’t come with annual fees.

Important notes about building credit with a credit card

Getting a credit card can help you build your credit so long as you treat it responsibly – otherwise you are only going to hurt your credit score. Credit cards can be a trap for some people, so it’s best to make sure you only make charges you can and will pay in full each month. Otherwise you may find yourself getting into a cycle of debt that is difficult to escape from.

Tips to establish your credit and increase your credit score:

Understand how your credit score works.

Only charge what you can pay with cash.

Pay your full credit card bill each month.

Repeat the process.

Add time.

The key to establishing a good credit history and credit score is being able to prove that you are responsible and can continually pay loans that you receive. There is no silver bullet to improving your score quickly; it takes time and commitment.
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Should You Use a HELOC to Consolidate Credit Card Debt?

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Should You Use a HELOC to Consolidate Credit Card Debt?

Ryan — Tue, 09 Feb 2010 15:52:45 +0000

Credit card debt can be a budget killer, especially with many credit card companies raising interest rates.It’s not uncommon for credit cards to come with interest rates around 15% or higher. It can take 10 years to pay off your credit card debt if you only pay the minimum on each card. Even if you pay extra on your cards it can take years.

The best way to get rid of credit card debt is a combination of lowering the amount of interest you pay and paying extra on your credit cards. I recently had a reader contact me about using a Home Equity Line of Credit (HELOC) to consolidate his credit card debt so he can pay it off more quickly. Below is his question, some pros and cons to using s HELOC to consolidate credit card debt, and some alternative options.

Should I use a HELOC to consolidate credit card debt?

I was on your website and was reading your information about HELOCs and other vehicles that can help to secure / pay off unsecured credit card debt. I am fortunate in the fact that my house is paid off in full and last year appraised at about 450k. That said, I have about 34k in credit card debt that is eating me alive. Is there a way for me to borrow against the full equity I have in my house to pay all the credit cards off? I want to make a wise choice and not a foolish one. Please let me know what my options are.

Thanks, Chris

Chris, thank you for reading my blog and contacting me.It’s awesome that you eliminated your mortgage, and hopefully you can eliminate your credit card debt. The following is giving general information, not recommendations. Always do your research before making important financial decisions.

Pros and Cons of using a HELOC to consolidate Debt

HELOCs are a flexible line of credit. They are always open, which means you have access to the equity in your home at any given time. Their flexibility makes them a great option for debt consolidation, home improvements, or an emergency source of funds. The interest rates are also usually affordable, often coming around 5% or so.

While there are many benefits and uses for HELOCs, there are also associated cons to using a HELOC. The biggest downfall is that you are tapping home equity; if you default on the loan, the bank can take your home. Because you are laying your house on the line, you need to make sure you have the cash flow to cover the loan.

Best debt consolidation options

The most important things to look for when doing your own debt consolidation plan is the interest rate, whether or not the debt is secured, and flexibility. Your credit cards are currently unsecured loans, meaning the banks can’t repossess anything if you default on your loan. A mortgage or HELOC would be a secured loan, as would a car loan, meaning the lender could repossess the item if you default.

o% balance transfer credit cards. 0% balance transfers allow you to transfer your credit card debt to a 0% interest credit card. There is usually a 3-5% fee to do transfer your credit card debt, but you lock in 0% interest rates for up to 12 months. This is an incredible deal if you can pay off your credit card debt in that amount of time, and will probably save you the most amount of money in the long run. You can save a lot of money with 0% balance transfers.

HELOC. The next option to save the most amount of money is a HELOC, which usually has an interest rate around 5% or so. The downfall is that your debt is secured with your home, so if you don’t want to default!

Personal line of credit or P2P loan. You may be able to get a personal line of credit through your bank, or you may be able to get a peer to peer loan through a company such as Lending Club or Prosper, which both allow regular folks to loan people money for things like paying down credit cards at a lower interest rate. The interest rates are generally a little higher than HELOCs, but are lower than most credit cards.

Change your spending habits!

All of these ideas can help you save money, but the most important thing to do is to change your spending habits in regard to credit cards. You will not be able to pay your credit cards off quickly if you continue adding debt to them. Make the commitment to no longer using your credit cards, then consolidate your credit card debt to a lower interest rate. Then begin aggressively repaying your loans to get them eliminated as quickly as possible. Once you have completely eliminated your debt you will enjoy a much higher monthly cash flow and you can begin watching the power of compound interest work for you, not against you!

Best of luck, and I hope you are able to pay of your credit card debt soon!
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Check Your Credit Report Often

Ryan — Sat, 23 Jan 2010 01:40:51 +0000

Your credit report is one of the fundamental financial documents that represent your overall financial health. Your credit report is used whenever you apply for a loan, credit card, mortgage, and sometimes even a job or security clearance. Having a clean credit report, and a high credit score can save you thousands of dollars in interest over the life of a loan, and make it easier for you to be approved for a loan request.

What many people don’t know is that your credit report can be used to help you monitor your financial situation and detect identity theft. Because your credit is linked to so many aspects of your financial life, I recommend checking your credit report often – to verify accuracy of your credit report and help monitor for identity theft and other credit fraud.

Check your credit report often

Problems with your credit or fraud can cause huge problems if left unattended. The more quickly you detect an inaccuracy or fraud, the easier it is to get the problem taken care of. Because your credit report and credit score are so important, it is imperative that you ensure they are accurate. Thankfully, you can get a free copy of your credit report from each of the three major credit bureaus once per year from AnnualCreditReport.com. You should note that the free credit report does not come with a free copy of your credit score, but I will show you how to get that later in this article. Before we go further, let’s look at why you should monitor your credit report and examine some common errors found on credit reports.

The need to monitor your credit report

Your credit report is a historical list of each credit account you have ever opened or been listed on. Inaccurate information can cost you thousands of dollars – either from a lower credit score than you should truly have, or by not noticing when someone steals your identity and racks up thousands of dollars in debt in your name. Checking your credit report often will notify you quickly if there are any inaccuracies or other problems that need to be taken care of.

Reasons you should check your credit report often:

Accurate listings

Fraud detection / prevention

To work on improving your credit score.

Monitor for inaccuracies on your credit report

Mistakes happen. Some of them are honest errors, but some of them may be a more serious indication of fraud. Go through each line item thoroughly to verify it is a credit account you opened, and that the information is still accurate. It is not unheard of for information to be transcribed incorrectly and to see someone else’s information on your credit report. For example, if they have the same name or a similar Social Security Number. Look for some of these common errors and contact the credit bureau if you notice any errors or fraud.

Common credit report errors:

Inaccurate personal info. Name, Social Security Number, address, etc.

Inaccurate/outdated account info. Recent account closures, credit limit changes, etc.

Inaccurate listings for delinquencies or missed payments. Provide proof of your payments with bank statements or canceled checks.

Missing Accounts. Verify each account you have open is listed.

Duplicate Accounts. Double check that no accounts are listed more than once.

Phantom Accounts. Phantom accounts belong to someone else or don’t exist at all. These may be more common if someone has a with a similar name or Social Security Number as you.

Negative line items more than 7 years old. Your credit score should usually only list items that are within the last 7 years.

How to check your credit report for free

You can get a free copy of your credit report from each of the three major credit bureaus one time per year. To get your free credit report, simply go to AnnualCreditReport.com and sign up for your free credit report offer. Be sure to watch out for the “upgrades” that offer to sell you your credit score. We’ll show you how to get that in just a moment.

To maximize your value, get your credit reports 3 times each year (one every 4 months from a different credit bureau each time). For example, get your free credit report from Equifax, wait, get it from Experian, then TransUnion. You can also add your spouse or significant other to the mix, which will help you monitor his/her credit report as well as monitor any joint credit accounts you may have. In that scenario you can get a free credit report as often as every 2 months.

How to get your free FICO Credit score

While your credit report is free from AnnualCreditReport.com, your credit score is not. You have the option of buying it at a discounted price when you get your free credit report, or you can easily get your free FICO credit score by signing up for a free trial with a credit monitoring service, then cancelingit before the free trial period ends. The free trials usually last 7 – 30 days, which is plenty of time to save a copy of your credit report and credit score. It is the easiest way to get a free copy of both your credit report and credit score.
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207th Carnival of Debt Reduction

Ryan — Mon, 31 Aug 2009 12:16:36 +0000

Welcome to this week’s Carnival of Debt Reduction! For those not aware, a blog carnival is a gathering of top notch articles under one topic. The goal is to bring readers relevant and timely content so they don’t have to go searching through the web to find it. The Carnival of Debt Reduction is a weekly carnival with a rotating host – hopefully exposing readers to exciting new blogs. This is the 207th week this carnival has been published… an amazing feat!

Carnival of debt Reduction

Editor’s Choices: These are the articles I give top billing to for their usefulness in helping you get out of debt:

FMF from Free Money Finance asks us an all important question: Life or Debt? In his article, he shares 41 financial calculators for major life decisions. Several of these calculators can help you manage your debt.

Ask Mr. Credit Card interviewed Matt Jabs on Blog Talk Radio about his experiences with debt.

Debt reduction tips:

Slow and steady wins the race, or so says Dawn from Frugal for Life. She submitted a post called Digging Out of Debt With a Spoon. Ever see ShawShank Redemption? It’s that kind of dedication that will get your out of debt.

Need a little help with your interest rates? Then Jim from Bargaineering has some tips on how to compare 0% balance transfer offers. You can check out the best 0% balance transfer credit cards if you are looking for a top notch balance transfer credit card.

The Canadian Finance Blog tells us we can speed up our debt reduction process by avoiding finance fees and other charges.

M is for Money asks if you can keep your credit cards while working toward reducing your debt. Some people may be able to, while others should get rid of their cards.

Buck$ome shares his progress with using the cash-only “Envelope System” in an article called Success with Envelopes.

Amanda from Frugal Confessions goes on spending lockdown to reduce debt. It’s times like this that it helps to have something in the reserves!

All about your credit score:

Understanding your credit score can be an intimidating topic when your first start out, which is why this article is so helpful. Check out basics of credit score and credit report and how often to check by Ray from Financial Highway.

Prime Time Money tells us how to get your Free Credit Report from AnnualCreditReport.com.

Thanks to the bloggers for sharing their articles, and thanks for reading!

Please visit the Carnival of Debt Reduction website for more information about this carnival. If you would like to submit an article for a future edition, please read the Submission rules carefully before submitting an article. If you are a blogger who submitted an article that was not included in this edition, it is probably because it did not meet the submission requirements.
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Will My Credit Cards Affect My Ability to Get a Car Loan?

Ryan — Mon, 29 Dec 2008 09:51:42 +0000

I received a reader question last week about how credit cards and available credit will affect her ability to get a favorable rate on a car loan.

Now let’s look at her question:

I am writing because I was curious what effect my credit cards will have on getting a car loan with a good interest rate. I have 6 credit cards that total an available balance of $14,500. When I say available I mean just that, the balance on all the cards is zero and has been for about 6 months.

I was deployed to Iraq and decided to get out of debt first thing. Paid them all off in a matter of 5 months.

One of the cards is almost 7 years old, 3 of them are 5 years old and the other 2 are about 2 years old.

I was discussing this with someone and they mentioned that lenders may frown on me having that much available credit.

My income is quite low while I am home because I am also a college student therefore I can’t claim my GI Bill as income because it’s contingent on me attending school.

So I would say I gross about $16,000 a year while at home as far as what can be considered toward my income to debt ratio.

Will these cards hurt or help me and what is the best scenario if it is more beneficial to close the accounts, considering I want to buy a car within the next 6 months.

Thanks,

K.

Hello K,

Thank you for contacting me, and thank you for your service to our country. And congrats on eliminating your debt, that puts you in a much better position to obtain favorable loan conditions!

To answer your questions I will also reference some articles I have previously written. The links are below so you can find more details.

How is Your Credit Score Determined?

How to Improve Your Credit Score

Think Twice Before Canceling Credit Cards

With the information in the above articles, you should understand how your credit score is determined, how to improve it, and why canceling your cards may not be a good idea – particularly your older credit cards.

You should already have a high credit score. Your credit score is determined by your payment history (35%), amounts owed (30%), length of history (15%), new credit (10%), and type of credit (10%). You can reference the above articles for more information. Based on this formula, you should have a good score, so long as your payment history is good (ie you haven’t missed (m)any payments). Everything else is in your favor – you don’t owe any money, the length of your credit history is good, and you don’t have any new credit. I don’t know the type of credit you have, and some types are less favorable than others – for instance a payday loan is less favorable than a major credit card.

Don’t cancel your credit cards. Canceling your credit cards reduces the average age of credit, which can lower your score. A better alternative is to request that the credit card companies reduce your available credit on the cards you don’t use. If you feel like you don’t need a lot of available credit, reducing all but one card to a minimum level (probably $1,000) will reduce your amount of available credit and may make it easier for you to get a favorable loan rate.

Debt to income ratio. Your credit limits don’t actually count toward your debt to income ratio because it is only available credit, not credit you are using. Your debt to income ratio is currently 0 because you have no debt. When you take on a loan, your debt to income ratio will change, but unless you get an expensive car, your debt to income ratio should be relatively low.

Loan rates vary. There are many factors that lenders use to determine the rates they will offer. Your credit score should be high, which is in your favor, and you can lower your available credit by reducing the limits on your credit cards. The biggest factor you have going against you is your low income. If you can demonstrate to your lender that you are living at home, have few expenses, and have sufficient income, you may be able to receive a good loan rate.

My advice: You have 6 months before you plan on buying a new car, so save up as much as you can right now, and put the money in a high yield savings account such as ING Direct, where you can earn interest on your money while you wait.

I recommend doing your homework before buying a new car and before taking on a loan. Examine you needs now, and look ahead a few years – if you plan on getting married or starting a family in the near future you don’t want to buy an economy car now and need to trade it in in a few years if your needs change. Since your income is low, try finding a quality used vehicle that meets your needs, and consider buying a car that is closer to the entry level line than the luxury level line.

Then shop around for interest rates. Try your bank first (I currently use and recommend USAA, but go with whichever bank you are comfortable with). And don’t be afraid to check out dealer financing options. Many dealers are hurting in the current economy and may be able to give you a good deal.

I hope this information helps, K. Good luck in finding a good car at a good rate!
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Should You Pay a Debt Consolidation Company?

Ryan — Thu, 13 Nov 2008 10:24:31 +0000

I recently received a reader question regarding debt consolidation services:

Hi Ryan,

Do you have any recommendations or advice for someone looking to consolidate their debt? I’ve got too much debt right now and I’m struggling to meet my monthly payments.

Thanks,

Shawn

Hello Shawn,

Thank you for your question. Several months ago I answered a similar question on Cash Money Life – which debt to get rid of first? I pointed her to Dave Ramsey’s Baby Steps. Both of these articles cover the same topics, but the second one is the introduction to a series written by several bloggers.

Dave Ramsey’s Baby Steps calls for you to:

assess your situation

make the commitment to get out of debt

get current on all debts

focus on repaying what you have using the snowball method

As for consolidating your debt, that may or may not be necessary. Most debt consolidators just charge you to do something you can do on your own. I recommend investigating these steps first to see if you can make a plan that will get you out of debt without going to someone else. Here is how to do your own debt consolidation plan.

If you determine you still need a debt consolidation, then there are many options. But be sure to read the small print concerning how much you will be paying – not only per month, but in total interest. Sometimes the debt consolidation loans will lower your payments to an easy payment, but stretch your payments out several years. Also make sure you understand which fees you are paying them. Here are more reasons you should not pay for debt consolidation.

Personal loans may be another option to paying a debt consolidator. You can always try talking to your creditors to try and lower your payments or the interest rates you pay, or you can look into taking a personal loan through your bank, or from a peer to peer lending company such as Prosper, Lending Club, or Loanio. These companies allow borrowers to borrow money from other individuals at rates that are generally lower than the rates they can get from a bank. Again, read the terms and conditions, and do what is best for your situation.

Without details, it is tough to give anyone real advice, but the principles outlined in the articles I linked to may be helpful. Just remember, the most important thing for you to do is change your current lifestyle to get away from adding more debt – and focus on repaying the debt you have now.

Good luck, Shawn.
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Your Good Credit is an Asset

Ryan — Wed, 01 Oct 2008 10:27:38 +0000

Credit scores are often discussed by the media and on advertisements on the radio and television. Even though most of those companies are trying to get you to buy something, they are moving in the right direction. Your credit score is very important. It is a valuable financial asset that you carry with your wherever you go, which is why it is important to take care of it and try to maintain a high credit score.

What is your credit score?

Your credit score represents your financial reputation. It is a reflection of your payment history, how much you owe, the length of your credit history, types of credit you hold, and any recently opened credit lines.

Here is how your credit score is determined:

Why your credit score is valuable

Borrowing Money: Banks only lend money to people who they believe will repay them. A poor or non-existent credit history may prevent you from getting a loan. If you do get a loan, you will represent a higher risk, so your interest rates will likely be much higher than if you had good credit.

Note: Due to the current financial crisis, many banks have tightened lending restrictions, making a high credit score more valuable.

Interest Rates: Banks charge interest rates based on several factors – namely, how much it costs the bank to borrow money, and how much of a risk they are taking when they lend money out. The lower your credit score, the higher your risk, and the higher the interest rates you pay. A high credit score can result in lower interest payments, which can equal thousands of dollars over the course of a loan.

Insurance Rates: Insurance companies almost always run a credit check when giving quotes because there can be a correlation between credit worthiness and responsibility. A longer credit history and higher credit score will usually result in lower insurance premiums.

Employment: Background checks are becoming more popular as a pre-screening tool for job applicants. Hiring companies want to make sure their prospective employees are a good investment for their salaries and training dollars. Your credit score is usually part of that background check, especially if your job deals with financial information or other sensitive data.

Security clearances. Many military and government jobs require a security clearance. Part of the security check is your credit score, which can have a direct impact on your ability to get a security clearance. Your inability to get a security clearance due to debt can ruin your military career.

Renting: Landlords are in the business for one reason: to make money. The house or apartment they rent is an investment and they want to ensure their tenants are going to pay. A credit check is often part of the pre-screening process they use when renters apply for their property. A poor or non-existent credit history may make it more difficult for you to find a landlord who will rent an apartment or a house to you.

Cell Phones: Your credit history even comes into account when you apply for a cell phone. Cell phone companies want to ensure they are going to get their money on time every month, and if you have shown a history of not being able to make payments, cell phone companies will be less likely to sell you a phone plan.

A strong credit history is a valuable financial asset

In our society, having an established credit history and a credit score is essential. A lack of a good credit history can put you at a financial, professional, and social disadvantage. Your credit score is your responsibility. If you do not have a credit history, I recommend taking out a small loan to prove you can make payments. If you have a poor credit history, I recommend working on improving your credit score.
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Does the Military Pay System Cause Troops to Use Payday Loans?

Ryan — Fri, 19 Oct 2007 07:16:22 +0000

The military has recognized that many of its troops get into financial trouble by frequenting Payday loan companies. The problem has become large enough for the Pentagon to attempt to limit interest charges on loans to military members.

There are several reasons why military members use payday loans. Lack of financial education is one reason many troops run into financial hardship. For many troops, especially young enlisted members, this is their first time living on their own and their first steady paycheck. Many young troops do not know how to handle money and quickly learn that their money will not go as far as they thought it would.

Another big cause for financial hardship for troops is the military pay system itself. All military members receive a base pay, and they usually receive other pay and benefits as well. The two most common are Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS). BAS is a monthly food allowance.

However, there are many other special allowances and special duty pay which can be based on locality, duty, and many other factors. Some of these are tied to inflation, exchange rates, or are prorated based on the amount of time spent in a locality. There are also Hazardous Duty Pay, Imminent Danger Pay, Family Separation Allowance, special tax free provisions for serving in a tax-free zone, Hardship Duty Pay, etc. This is a short explanation and if it sounds confusing, it is. The military pay system is very complex.

To put it simply, many military members do not know how much they will earn from month to month – especially if they are deployed or are on temporary assignment. Not knowing how much your income will be from month to month makes planning and budgeting very difficult and can easily lead to financial hardship.

A very good friend of mine recently spent 4 months on temporary assignment. When he returned to his permanent duty station, he filed his paperwork and received a large check for his per diem. He was due to receive a large reenlistment bonus early next month, so he used his per diem money to pay off some credit card bills.

Unfortunately, the government overpaid him $2000 for his per diem and withdrew the entire amount from his account without warning. When the government makes an overpayment, they just take the money in a lump sum. You then have to contact your military finance section to figure out what happened (they do not notify the military member first).

Like many people, my friend could not easily absorb an immediate loss of $2000. Luckily, he was able to get a short term loan from a family member until he receives his reenlistment bonus next month. If my friend did not have a family member who could help him out, he would have had to get a payday loan or use the credit cards he had worked so hard to pay off.

The government could change the way the take back over-payments. The easiest way would be to notify the member that they will either take back x-amount on a certain date, or they will withhold x-amount from each check for a certain time period. Having your employer take back $2000 at one time and without warning after they paid it to you (and you had no reason to assume they made an error) is irresponsible and causes undue hardship to its employees. This situation doesn’t happen often, but unfortunately it happens more often than it should. I have known several troops who had a significant overpayment taken from their account without warning.

The Pentagon is currently working to streamline military pay and benefits. I hope they can simplify the pay system soon. It is very unfortunate when military members have to focus on their pay and not at the mission at hand.
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How to Avoid Payday Loans

USAA Teams with Strikeouts for Troops in Honor of September 11th

Interest Limit on PayDay Loans for Military Members

Ryan — Mon, 17 Sep 2007 07:40:57 +0000

The DoD has pushed for a limit on the interest rate that payday loan companies can charge military members, claiming that the high interest rates payday loan companies charge hinder military readiness levels and destroy the morale of troops and their families.

Last October, Congress passed the “Military Annual Percentage Rate” law, which will effectively limits the ceiling for payday loans at 36% annual interest rate, including all fees charged. The law would also prohibit penalties for prepayment and all fees would have to be disclosed in writing when the loan is granted.

The law was recently published in the April 11th Federal Register (pdf file), and is open to public comments for 60 days. Afterward, some tweaking may be done before the law comes into effect October 1st. Some critics argue that there are substantial loopholes in the wording of the law that will make it easy for payday loan companies to work around this new law.

This law has the potential to effectively end payday loans to troops because most of these payday loan companies will refuse to lend to troops at a 36% annual interest rate. The difference on a 2 week loan (2 weeks in a pay period), is staggering. Most companies charge between $15-20 per $100 loan, which is over 400% annually. If the interest rate is limited to 36% annually, the amount the company can charge is reduced to $1.38 per $100 borrowed. The companies spend more than that to process checks and pay salaries. So, I imagine this sort of lending to troops would dry up pretty quickly.

Either way, it is unfortunate that military members feel they need to take out these loans. Yes, it is true that many military members do not make substantial amounts of money. But, it is also true that the military has mandatory financial seminars and classes new troops must go through. There are also groups, such as the AF Aid Society, that can financially assist members in need. I am sure each military branch has its own similar foundation.

With the proper financial education, most troops should learn to stay away from these places. And for those times where the troop was dealt a tough situation, they should feel they can go to their leadership or to one of these aid groups that are there specifically for that purpose.
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