As a real estate investor, one of the most important assets you have is your credit score. Even if you use private money or aren’t currently looking for lender financing, you never know when you will need a loan. Maintaining a good score is something that is not difficult to do but it requires periodic diligence. Much like other aspects of the business, you should know where your score is at all times and what is owed on every account. If you don’t have a good credit score, you will find that your options will be limited. Perhaps even more importantly, a good credit score will allow you to take your business to the next level with relative ease.
The first step in having good credit is to know where your score currently stands. If you haven’t pulled your credit in months, the last score you remembered may be drastically different from what it currently is. Your score changes every month, based on the timeliness of your payments, the amounts owed, the length of each account is opened and number of new accounts recently opened. There are plenty of good websites that can track and monitor your credit. It is up to you to know what your score is and how each payment and balance affects it. On the other hand, to neglect your score is to neglect your business.
It is ill advised to assume that paying on time every month will lead to a good credit score. Payment history is the most important factor, but that alone is not enough. If you pay everything on time but are overextended on multiple accounts, your score will be lower than you expect. The percentage to what is owed in relation to what your limits are is almost as important as paying the account on time. Accordingly, paying down your accounts is critical. Every time you close a deal and have surplus funds you should think about paying down your high balances. You may not think you are getting anything out of your money, but this alone could impact your score by 20-30 points.
It is also important that you check your credit constantly. Always be on the lookout for any errors or recently opened accounts that are not yours. If you have a popular last name, you are much more likely to have accounts that aren’t yours on your credit report. The sooner you can catch them, the easier they are to remove. Once they are on your account for months, it becomes difficult to track down who opened it and get it removed from your credit. Even if you can get them removed, the process can take several weeks, if not months, and then another few months to be reflected in your score. By using credit monitoring services, you can receive an alert every time a new account is opened. If it is not done by you, there are ways to block the account so you never have to get to that point.
You may not think that your score is that important until you apply for a loan. However, you will likely find that most investment programs require a score of at least 700, with some as high as 720. These are considered above average scores, which require you to stay on top of your credit. Without these scores, you will not be able to find lender financing. If you do, you will be subjected to a higher interest rate or have to put a larger down payment down. It will also influence the amount you may be able to refinance on any property. A higher score will permit you to take more cash out, either through a line of credit or a cash out refinance. Investment loan programs have undergone the most changes in the past few years and any approval starts with an excellent score. Without it, your options will be limited.
Not only is your score important for lender refinancing, it is also important if you are seeking any type of credit, even private money financing. If your score is low, the interest rates on your credit cards will be much higher and it will start a cycle of taking longer to pay these debts off. This will lower your score and make it harder to pay off. As a rule of thumb, you should only use credit when you think you can pay it off in 30 days. If you are reliant on new credit to survive, you should examine your business model and your current balance sheet. Once you lose access to credit, it can choke off your business and make growth very difficult, if not impossible.
Having money in the bank and reserves to fall back on is important, but your credit score is equally important. There is currently a fine line between loan acceptance and not being able to close directly because of your score. Even if you are approved for a quarter or half point higher interest, it can cost you hundreds of dollars more every year. Not paying a bill on time or adding debt without purpose can ruin your credit if you are not careful.
Regardless of how you fund your deals, you never know when you will need to use your credit. Never assume that your score is good without checking. What you might find can be quite a surprise.
