Your credit score is one of the most important assets you have in the real estate investing business. Even if you use alternative means of financing, the odds are you will need lender financing at some point. While a large down payment and low debt to income ratio are nice, without high credit scores you may be forced to pay higher interest rates or even struggle to get approved. In spite of the importance of maintaining good credit many people don’t fully know what that entails. In fact many investors aren’t even aware of what their credit score currently is. In order to keep your investing business growing you need to do everything you can to protect your credit score.
Before you consider how to protect your score you need to know what your credit score is. This is a number that you are given by the three major credit reporting companies Equifax, Experian & Transunion. It falls in a range between 350 to 850 with 850 being the highest. Your score is based on few different sets of criteria: payment history, amount owed, length of credit history, new inquiries & type of credit. Payment history and amount owed are weighed higher and are more important than the other items combined. That being said it is still important to always know what is on your credit report and what can cause your scores to change. Most lenders will take the middle credit score out of the three but some will use the high or low number. This can make all the difference in your loan approval and ultimately your business.
Payment History: The timeliness of paying your bills is the most important factor in your credit score. This accounts for roughly 35% of your score. Obviously if you are constantly late on your accounts this is viewed as a credit risk. Most accounts offer a grace period before you are considered late but it is important not to develop bad habits. One late payment on a credit card that you forgot about can cause your score to plunge. It is as easy as ever to pay bills either online or from your phone. If you have the funds available there is really no excuse to ever have a late payment. The best solution is to not open new accounts that you really don’t need. If you can’t pay for something with cash you should skip the purchase. Do you really want to pay for something with 11% interest?
Amount owed: You can pay everything on time but still not have the credit score you desire. The reason for this is that you have minimal room on all of your accounts. Simply put this means that you are nearly maxed out on these accounts or you owe close to the high balance. This makes up about 30% of your score and is often the hidden mover of your credit score. The reason that credit companies view this with such importance is that if you are nearly maxed out you don’t have much margin for error. They think that if you had assets to pay these cards down you probably would have already. By having a high balance you can’t rely on credit in a pinch and will eventually default on an account. This can be cured by transferring balances around on credit cards or working to pay down a mortgage. One extra mortgage payment a year can put a chunk in the balance owed. You should also pay more than the minimum owed on your balances. In most cases the minimum payment will do little to nothing to lower your balance.
Length of credit history: Creditors like to see a history of timely payments over multiple years. This accounts for about 15% of your score. Having a fair credit history over a longer period of time will not give your score a boost. A longer history may increase your score but a late payment is still a late payment. Opening up a bunch of new accounts if you have none is also viewed as a risk. If you need to open accounts do so over a few months. Even one a month is much better than five in one week.
New Inquiries: When you are shopping for credit you have every right to call around and find the best deal. That being said you need to be careful how and when you do it. By having your credit pulled multiple times in a 30 day period this will have a negative impact on your score. Credit companies think that by having these pulls you are having trouble getting approved for a credit card, car or mortgage. If you are having trouble getting approved there must be an issue that is not yet reflected on your payment history. New inquires only account for around 10% of your score so it won’t have a major impact but sometimes a couple of points makes a difference.
Type of credit: Mortgages or car loans are borrowed against the collateral (real estate or car) and are viewed as safer items to lend to. Credit companies give a little weight to the type of accounts that are on the credit report. If the report is littered with credit cards they can go south any given month. A few credit cards are acceptable but too many is viewed as a risk.
Like everything else in real estate it is important to stay on top of your business. In this case you need to know where your credit scores are at all times. There are many online companies that provide monthly updates or alerts at minimal charge. You never know when you will need lender financing or to open up a new account. A good score can make all the difference.