Investor’s Guide to Credit
Are you looking to start a journey into real estate investment? The size of your credit score
matters if you want to get that property of your dream. It’s important to understand how credit
score works, how it is calculated, and what you can do to improve your credit.
Let’s run a quick calculation:
Assume that you want to start investing and you have a high credit score that, for instance,
qualifies for an 80% LTV loan at a 6% interest rate with two points. If you want to buy a $500k
property with a rent of around $8k/month; you can get a loan of $400k, with your $8k due in
points. You will also be qualified for a payment of $2,400/ month.
Now, assume you have a small credit. You may not find a lender that will give 65% LTV, at
10% interest and four points. And that is if your credit score is not lower than 640.
That means your loan would be $325,000, and owe $13,000 in points at settlement and a
monthly payment of $2,852.11.
That’s a bummer!
How Credit Ratings Are Determined
There are three major credit bureaus: Equifax, Experian, and Transunion. They all quantify
creditworthiness slightly differently, using the same scoring models.
Your payment history affects your credit score the most. If you make a more than 30 days late
payment, it harms your credit score.
Following that is the percentage of available credit that you use. For instance, if you have a
credit card limit of $10,000 and a balance of $2,500, your credit utilization ratio is 25%. (At least
for that card).
Here’s How to build an awesome credit score.
Review Your Credit Report and Correct Any Errors
Every day, credit reporting agencies process billions of transactions. They can make a mistake
with such intensity, leaving your credit score negatively impacted. Below are things to look out
- Accounts that aren’t yours or that should be reported but aren’t.
- Inaccurate delayed payments.
- On-time payments recorded as late.
- Deleterious public documents that aren’t yours (bankruptcies, liens, foreclosures, etc.).
Credit reporting agencies make errors, and you must correct them if you want to improve your
Get a Credit Card
While many households misuse credit cards, you need credit reports, hence, a credit card.
A secured credit card helps you boost your credit score. To get a secured credit card, you must
deposit a cash collateral. If you pay your credit on time, the credit card issuer will notify the
Credit Bureaus, leading to an improved score. But if you default, you lose credit points.
Remember that the purpose of a credit card is to maintain good records, so, do not overspend or
default on payments.
Apply for a Credit Builder Loan
The term “loan” is actually deceptive because you are the lender.
It works like this: you agree to pay a set amount of money over a set period of time, say $40 per
month for 18 months. The “lender” reports your payments as on time throughout the loan term,
and you receive your money after loan completion.
At least, the majority of it.
Request an Increase in Credit Line
Recollect how credit reporting agencies look at the lending ratio? You can improve this ratio for
spinning lines of credit (such as credit cards) by simply increasing the credit limit.
If you placed $1,000 on your bank card every month but your credit limit is only $2,000, you’re
using half of your credit limit each month.
Increase your credit limit to $5,000, and you’ll find that you’re only using 20% of your available
credit each month.
Creditors will be more willing to increase your credit limits as your credit history grows.
Report Your Rent Payments to Credit Bureaus
Rent payments to credit bureaus can help renters build credit quickly. Of course, you can’t
control everything. You’ll need to ask your landlord to collect rent using a reporting service. But
it also benefits them by encouraging timely rent payments.
Think About Credit Repair
While credit repair services are not for everyone, they can help you improve your credit faster.
They’ll handle credit reporting errors and disputes for you, and show you how to improve your
Explore Pay for Delete
With Pay for Delete, a credit collector agrees to remove a collections from your credit report if
you pay past debts.
It works like this: A collector reports every default and unpaid debts to the three Credit Bureaus,
negatively impacting your credit score and remaining on your credit report for seven years. To
mitigate the negative impact, you can strike a deal with a collector to remove such reports.
Good credit helps you secure valuable loans for real estate investments. You must consistently
monitor your credit to ensure that you have enough score to access tangible loans when a real
estate investment need arises.