Past credit use affects your ability to borrow again. When you need a loan, you want to know how much you can borrow, how long you’ll have to repay, and what borrowing will cost.

What the lender wants to know is if you’ll repay. To decide, the credit union or bank investigates your creditworthi­ness, or how responsible you are with the credit you already have. Lenders aren’t the only ones who want to know. Landlords check before renting to you. Employers investigate before offering you a job. And, for service members, credit repu­tation plays a major role in gaining and maintaining security clearances and the ability to continue to serve.

A credit report and the credit score derived from it are the primary sources of information about your creditworthiness. The credit report is a constantly updated record of all your outstanding credit accounts and the way you repay them. The three-digit credit score is calculated using this data and a proprietary algorithm that considers these details:

• Your payment history, or if you regularly pay on time

• How much credit you’re using

• How long you’ve been using credit

• The types of credit you use

• How much new credit you’ve applied for recently

The most common credit scoring models range between 300 and 850. Generally, scores above 700 are considered good, making you eligible to borrow at a competitive rate. Lower scores may mean you’re turned down or that the interest rate you’re offered is subprime, or higher than the current average. That makes borrowing more expensive.

Recognizing that the way you manage your money in checking, savings, and money market accounts is also an import­ant indicator of financial responsibility, FICO is introducing a new approach to creating credit scores.

It looks at accounts you, as the applicant, designate that have been open for several years, show frequent transactions, and haven’t been overdrawn. The goal is to increase the number of loan approvals for people who might not qual­ify because they don’t have a credit score or have a low one that might normally limit their ability to borrow.

• If you’d like to your credit report to be stronger, you can make that happen. It may take time, but it’s worth it.

• Make every credit card, line of credit, and loan payment on time.

• Keep your outstanding balances below 30% of your credit limit. Below 10% is best.

• Don’t apply for new credit.

• Be diligent about paying off expensive credit card debt as quickly as you can.

• Continue to use some credit, and remember you don’t need to carry a balance to have a good score.

If you’re thinking about applying for a loan, it’s smart to check your credit report with one of the three national credit-reporting agencies— Experian, Equifax, and TransUnion—to see what’s there and confirm there’s no negative or incorrect information you should be prepared to explain. The reports aren’t identical, but they’re similar enough so major issues appear on all three.

You can access each report for free once every 12 months at www.annu­alcreditreport.com or by calling 877-322-8228. In fact, it’s a good idea to check your credit standing regularly by looking at a different report every four months so you see all of them during a year.

If you spot a problem, you might decide to postpone your application until you’re in a stronger position. But if you do apply, and your loan or credit card application is rejected, you should find out why. The lender must tell you the major reasons you were turned down, the credit score it used, and the name and contact information of the credit agency on whose report the score was based. You can request a free copy of that report from the credit agency within 60 days of being turned down. That’s in addition to the reports you can access for free.

Credit scores get a lot of hype. If your score is available for free, which it may be from your bank, credit union, or credit card issuer, by all means pay attention. But while checking your credit report is essential, paying for your credit score is not.

That’s because the score you’ll see is almost certainly not the same one a potential lender, insurance company, or landlord sees. Score providers create different versions of your score for different users by weighting the factors in their formula in different ways. In addition, each score provider uses its own algorithm, which produces different results from the same information.

Anyone who claims to be able to make your credit report stronger or your credit problems disappear with no effort on your part is at best misinformed and more often a fraud. There are legitimate ways to get help solving credit problems, such as Military OneSource (www.militaryonesourceconnect.org). But instant fixes aren’t among them.

If you find errors in your credit report, which you may, you can follow the instructions on the credit reporting agency’s site to correct them. The agency must investigate and report back to you, but it doesn’t have to change anything it believes is accurate. If the harmful infor­mation remains after 90 days, you have the right to attach an explanation of up to 100 words to the report stating your position. You should also alert any potential new lenders about the problem and provide an explanation, with written evidence if you have it.

When you invest, your goal is to increase your net worth by buying financial assets you expect to grow in value, pay dividends or interest, or provide both growth and income. But investing means you have to be prepared for risk. You might gain less than you expected or even lose some of your principal, or the amount you’ve invested, at times. That doesn’t happen when you save.

With saving, the primary risk is inflation, or the gradual increase in the cost of goods and services. If you earn less than the rate of inflation on your savings, your buying power is reduced. In contrast, taking some investment risk means that over time your investment gains have the potential to outpace inflation, sometimes by a wide margin.

As you begin investing, you’ll want to concentrate on three types of investments, called asset classes:

• Equity investments, primarily stocks and the mutual funds and exchange traded funds (ETFs) that invest in stocks

• Fixed income investments, primarily bonds and the mutual funds and ETFs that invest in bonds

• Cash equivalents, including certificates of deposit (CDs) and US Treasury bills (T-bills)

When you own stock, you have partial ownership in the corporation that issued, or sold, it. Ownership means you have a right to your share of any dividends the corporation pays out, the right to vote for corporate officers, and the right to sell at any time.

Stock prices aren’t fixed and may increase in response to positive investor demand. Then you can sell at a profit if you wish or keep the stock, increasing your net worth. But you have to be prepared for the possibility that stock prices can fall for a variety of reasons including problems in the economy or a decrease in investor demand.

Bonds are actually debt investments. When you buy a bond you’re loaning money to the issuer—a corporation, government, or government agency. In return, the issuer promises to pay you interest over the bond’s term, which can range from a year to 30 years or more, and return your principal when the term ends.

Bond prices can move up or down from the value at which they’re issued—$100 for US Treasury issues and $1,000 for most others—but they tend to vary less than stock prices. Among the reasons bond prices may change are changes in market interest rates.

CDs and T-bills are considered cash equivalents because they can be converted to cash at any time with little or no loss of value. That’s described as liquidity.

Before you invest, you need a strategy to guide your decisions about what to buy based on your goals, when you want to achieve them, and the types of invest­ments that can help you reach them.

This means zeroing in on the potential return that an asset class, though not every investment in that class, may provide.

Potential return is what you can reasonably expect to gain from an invest­ment. The average return each asset class has provided in the past doesn’t guarantee how it will do in the future. But it does provide guidance about the return it’s reasonable to expect over time.

For example, the average annual return on large company US stocks since 1926 has been about 10%, while the return on long-term US corporate bonds has been 5.3%. The average annual return on cash equivalents, in contrast, has been about 3%. Those returns, however, are before accounting for taxes and inflation.

To invest, you need an investment account. There are three major types, defined by the tax treatment of the earn­ings in the account: taxable, tax-deferred, and tax-exempt. You can invest through just one type or use all three, based on your goals and the amount you have to invest.

You can open a taxable investment account with a brokerage firm, the brokerage arm of your credit union or bank, or with an investment company that sells mutual funds directly to individual investors. You invest after-tax income and owe tax on your investment earnings and on any capital gains, or profit you make from selling an invest­ment for more than you paid for it. But the tax rate that applies to most long-term capital gains is lower than the rate on your regular income.

If you’re investing for retirement or to pay for your children’s edu­cation, you can use accounts that provide tax advantages.

A traditional tax-deferred retirement account is opened in your name in an employer-sponsored plan, such as the DoD Thrift Savings Plan (TSP). You contribute pretax income each pay period. Taxes on any investment earnings and on your contributions are postponed, or deferred, until you withdraw.

You may also open a tax-deferred individual retirement account (IRA) with a credit union, bank, or brokerage firm to invest additional amounts to help build your long-term financial security. Taxes on IRA earnings are deferred just as they are in the TSP account, and, in some cases, contributions may be tax-deductible.

You can also use tax-exempt accounts to invest for retirement and education. You contribute after-tax income as you do with a taxable account. But investment earnings aren’t taxed as they accumulate and no tax at all is due when you withdraw from the account provided you follow rules that apply to the account. Examples are tax-exempt Roth IRAs, Roth TSP accounts, and 529 College Savings Plans.

This Money Briefing is part of the Defense Credit Union Council (DCUC) “Armed Forces Financial Guide,” which you can download for free in English and Spanish.

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