Do you know your credit score? Do you care? As a real estate investor, you might want to know. Large real estate profits come about as a result of leverage. You put as little of your own money down as possible, and you use other people’s money (OPM) – either the bank’s or other investor’s – to purchase property. That way, the return on your money is much higher.
OPM comes at a cost, which is reflected in the interest rate a bank or investor will charge. The less risk they see in their investment, the lower the interest rate.
Your credit score is one way the bank or investor perceives their risk. So it’s important to know your score.
A great credit score will keep your costs down and your profits up when you take out loans. Can you still succeed in real estate with a low credit score? Sure. But it’s always best to have as many options as possible available to you for funding deals. Not to mention it’s also helpful in your personal life, such as for car loans and a mortgage for your own home.
Look at ‘The Big Three’
There are three main credit bureaus that banks and other lenders use to check your credit in the U.S.: TransUnion, Equifax and Experian. Lenders will look at all three to make sure there is no negative information on you in one that did not get caught by the others.
Each credit bureau has a different algorithm for checking your credit, and so your score will be a little different for each one.
Everyone in the U.S. is allowed to pull their own credit reports from each of these credit bureaus for free once a year. We recommend taking advantage of this free service at least annually to:
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Make sure there are no negative reports on you that are not correct; and
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see where you are before you start improving your score if your credit is not the greatest.
To get your free credit report from each of the Big Three, go to a service called Annual Credit Reports.
Scroll down toward the bottom of the screen and click on ‘Request your free credit reports.
The website will then take you to another screen, which will show you the three steps you need to do to receive your free credit reports:
As you can see, you will have to repeat these steps three times if you want all three reports. The questions in the third step are intentionally pretty difficult to safeguard your credit and identity, such as what the monthly payment is on one of your mortgages (especially if you have multiple loans). You may have to go through old bills to figure out what the answer is.
It’s also important to remember that this free service will not show you your credit scores, just your credit reports. The government does not mandate the credit score part of it.
Don’t worry though, you can still get the scores for free.
Go to this Equifax website and enter your name and email. Then sign up for the ‘Complete Advantage Plan.’ If you just enter your name and email, it automatically takes you to the registration for this plan. You will see they charge $17.95/month, but they also give you a 7-day free trial. That way, you can receive your three scores and then cancel your subscription within seven days for a full refund.
Note: You will only be able to do this once. However, if you have not had any late payments or other bad credit events each year, your credit scores should not change that much.
Anytime you are turned down for credit, the lender who turned you down is required by law to provide all this information to you as well.
And remember that you still can receive all your credit reports for free every year as required by law.
How They Score You
Once you have your credit reports, you might want to know how the three agencies score you. Well they keep the exact methods they use pretty hush, hush. But there are general rules out there:
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Payment History (35%) – Do you pay your bills on time or late? Do you pay them at all? That’s what lenders want to know, and that is why this is the biggest piece of the pie. The best thing you can do for your credit score is pay them on time. The longer you have a history of paying on time, the better your score will be. Late payments will eventually drop off this score, but it will take years.
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Amounts Owed (30%) – How much of your credit are you using? If you have a credit card with a $10,000 limit and you have $2,000 charged on it, you are using 20%. Higher credit scores are the result of lower balances. The bureaus think you are stretching yourself too thin if the balance on your cards is approaching 80-90% of your limit. In other words, you don’t want to use $8,500 of a $10,000 credit limit. But, this is the part of the score you can fix, and hopefully quickly. It helps to pay those cards down.
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Length of Credit History (15%) – They want to see how long you have had credit and been able to use it. Obviously if you don’t make your payments, creditors will cut you off and cancel your line of credit, whether that is a mortgage or credit card. If you have been making payments for a long time on a loan, it will help your score. A good trick to keeping this part of the score high is to never cancel a credit card once you open it. You can lock it away so you don’t ever use it, but a card with a $0 balance is only helping your credit history.
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New Credit (10%) – How often do you apply for credit? The idea is that if you are applying for a ton of loans, it must mean you are in trouble and may not be able to pay them back. Don’t worry though. Having a bunch of mortgage lenders check your credit at once so you can compete them against each other won’t hurt this part of the score. Credit bureaus see this as a smart thing to do.
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Types of Credit Used (10%) – Having different types of loans will help your score. There are two different types of loans:
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Revolving Credit – These are loans with a different balance each month, like credit cards. One month you may charge $485 on the card, and the next month you might charge $1,324.89.
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Installment Credit – Mortgages are a good example. Every month is the same payment on these types of loans.
Knowing your credit makes sense and can really help your real estate profits.
Check Your Credit Report Annually –It pays to check your credit. It is also a good way to check for identity theft, because if someone is trying to steal your identity, it will show up on the credit report.
Improve Your Credit – No matter how good your credit is, it pays to keep working on it. Lending standards are tightening up, and being the person who can get a loan puts you in the driver’s seat for purchasing some great deals at low costs of money.
Learn More About Credit Reports – Understanding credit reports will not only help you read yours, but will also help you understand other people’s. When you are considering being a hard money lender or thinking about renting one of your places to a prospective tenant, you want to know what risk you are taking.
JP Moses
is a real estate investor in Memphis, TN, with experience ranging from land lording to note buying, rehabbing, and wholesaling. However, wholesaling is the area that he enjoys most and where he bring the most experience and expertise to his students.