As much as investors talk about the ability to secure funding or being able to find new properties, the most important asset you have may be your credit score. Whether you are looking for traditional lender financing or seeking private money, your credit score will have a significant impact on how things transpire. It is absolutely critical to maintain a good score, but it also pays to know how to protect it. There are many people who think that paying your accounts on time is enough to have a good score. Timely payments are obviously a factor, but there is much more that goes into your credit score than that. If you want to maintain a good score, you need to know exactly what impacts it. Some of these items might be more surprising that you think.
Approximately 50% of your score reflects the punctuality of your payments. While a simple concept, staying on top of any open accounts is a must. Most people will know when their mortgage or car payments are due, but no everyone is on top of smaller accounts. However, a late payment is a late payment, regardless of the amount. Take whichever means are necessary to avoid missing a payment. We recommend setting up automatic payment plans if at all possible. It can also be beneficial to sign up for a credit report site. For a small monthly fee, you can track all of the accounts that impact your score and are on your report. You may even discover an account or two that is not yours or that you opened a while back and forgot about.
Aside from timely payments, the available balance your have on each account is taken into consideration. Even if you pay everything on time, your score will not be as high as you think if your available balance is not large enough. Larger balances without a lot of available credit are viewed as a red flag, as they may indicate an overextended debt obligation. If you decide to take advantage of holiday interest free deals at department or furniture stores, you immediately add a new account with a high balance and not a lot of credit. This alone will lower your score until you can work the balance down. If you pay only the minimum every month, your score will remain the same even though you are paying on time.
There is a belief that every time a new lender pulls your credit, the score goes down. This is true, but only in extreme cases. There is no hit to the score if you shop around to only a few lenders and have the credit pulled. The score will start to be impacted when you have it done six or more times in a 30 day period. The credit bureaus feel there must be a reason for the multiple pulls and that you are having trouble getting approved. If you are having trouble getting approved, there must be bigger issues with your income, employment or reserves. This is important to note if you are shopping for a mortgage. Car dealerships, home improvement stores, traditional credit cards and department stores will all report this to the credit agencies and will pull the score down. It is OK to shop around, but be mindful of how many people are pulling your credit every month.
If you know your credit score and are looking to get a boost, the best thing to do is to pay down any balances. Just as having high balances will lower your scores, paying down to under 30% of any limits will give your score a boost. You can start with the cards that have the highest monthly interest rates and go from there. Once you can pay down your down balances in time, you will see your scores take a pretty dramatic turn for the better. As quickly as a late payment on a small account can lower your score, you can reverse that trend by paying down debt. If you have the means and are looking for a quick credit fix, start with paying down your balances.
The last item to impact your score may be obvious, but needs to be addressed. Any past accounts that you did not pay can be sent to a collection agency. That old parking ticket, unpaid end of lease car bill or small credit card you took out in college and forgot about may end up on your credit report. These items will lower your score regardless of the amount. If you have moved, changed jobs or switched phone numbers, they may not have a way to reach you and you may have trouble finding them as well. This is why credit monitoring is so important. It allows you to deal with these issues as soon as they hit. Collection companies sell accounts every few months. If you don’t catch these early enough, you may spend weeks or even months trying to find exactly who has your account to pay it off. All the while your score will take a hit and your business will be impacted.
Achieving or maintaining a high credit score will give you multiple financing options that you otherwise would not have had. Everything in the real estate business revolves around the ability to find financing and close deals. Without a good credit score, this becomes difficult, if not impossible. Your credit score is that important.
