Understanding Your Credit Score
By JD Esajian on March 16, 2016
Your credit score is one of the most important elements in growing your real estate investing business. Even if you stay away from traditional lender financing you never know when you will need to use credit. Most people understand the importance of having a strong score yet not enough know what goes into achieving one. Paying everything on time alone will not equal a good score. This is just one of the many factors involved. Knowing what goes into determining your score is only half the battle. You also need to know how you can give your score a boost when you need it. Here are some factors that determine your score along with some tips for how you can improve it.
Your Credit Score:
Your credit is scored by the three major credit reporting bureaus: Experian, Equifax and Transunion. Individually they will come up with a score ranging from 350 to 850. Anything under a 600 typically represents below average credit. Most loan programs have a minimum score of 620. A score over 680 is considered good, but not great. Ideally you want your score to reach at least the 700 range with 720 the floor. Once you hit 720 you have your pick of loan programs without taking a hit on the interest rate. Getting your score to that level requires a mix of the following.
- Timely payments. Your credit score starts with an evaluation of payment history. Every time you are late greater than 30 days a mark is placed against the account. The greater number of months you are late the more severe the impact on your credit score. This is especially the case with any mortgages. A 90 day mortgage late can drop your score as much as 40 points. Each additional month that you are behind your score gets pulled down. This underscores the importance of staying on top of all your accounts and doing everything possible to never miss a payment.
- Total debt. While payment history is important it is not the only criteria. You also need to look at how much total debt you are carrying. If there is not enough available balance on your accounts your score will take a hit. Being maxed out, or near maxed out, gives the impression that you would not be able to withstand a short term financial setback. Because of this your score will be knocked even if your payment history is flawless.
- Age of accounts. Trying to give your credit score a quick boost by opening up accounts may not do the trick. The reporting agencies look at the length of time each account has been open. Having a lengthy track record of timely payments helps your score. Conversely opening up multiple accounts at once may do more harm than good.
- Type of accounts. The ideal credit report has a mix of different account types. There should be a good sample of revolving and installment accounts. These are represented though mortgage payments, credit cards, auto loans and department store accounts. The more spread out these are the great the impact on your credit score
Improving Your Score
- Remove delinquent accounts. The first step in improving your score is dealing with the deficiencies. If you have an account that you have been rolling 30 day lates with you should try to get current as soon as possible. This alone will give your score a boost. You also need to look at any old collection or charged off accounts. The old credit card you opened and forget about could be weighing your score down. Start by obtaining a copy of your report and dealing with any delinquent accounts first.
- Close old accounts. Closing your rainy day accounts impact your score. You may have a few old accounts open in the event you need them in a pinch. This is ok with one, maybe two accounts but there is no need to keep several opened. Every open account is viewed with the potential of accumulating more debt. If you are not actively using the account you should consider closing them.
- Pay down debt. This is easier said than done. As we mentioned excessively high balances pull your scores down. The best way to cure this is by paying down high balance accounts. A common strategy is to simply transfer balances from account to account. This may save you money on interest payments but won’t do much to improve your score. By making payments higher than the minimum you will see your score slowly improve.
- Patience. There is no magic cure for improving your score. If you prior late payments, foreclosures or a bankruptcy the only thing you can really do is wait. You should avoid spending money on companies that promise to give your score a quick jolt. These programs are intended for people that have misreported items on their report. There is no removing a legitimate late payment.
There is plenty of mystery surrounding the credit reporting and scoring process. Once you know what items may be dragging your scores down you can act to fix them. Start by obtaining a copy of your credit report. There are multiple websites that offer low cost, or even free, reports. Look at all of the accounts and confirm that the information is yours. From there do one thing at a time to improve your score. You never know when you will need to rely on credit.