The Importance of Good Credit
As a real estate investor, having good credit is of paramount importance when it comes to doing what you do for a living – buying and selling properties. Far more than just good business practices, maintaining good credit as an individual is a matter of good practices as a consumer. Last week, we briefly talked about the benefits of having good credit as an investor, but this week we’re going to go into a bit more detail as well as discuss the ways you can maintain good credit as you purchase and sell properties.
As we’ve mentioned in a previous blog, credit is essential to the world of real estate investment, no matter what capacity in which you participate. Whether you’re part of a trust or purchasing your properties yourself as a direct owner, having good credit is going to make your job and life easier. We’ve talked before about the importance of being a strong – that is, safe – borrower, and how it’s absolutely necessary to both know what your credit score is and maintain it to remain above 740 in order to avoid higher interest premiums. We generally advise anyone who’s looking to get into the field of real estate investment to refrain from jumping in until their credit score is acceptable, since so much depends on it. There are a few ways that you can maintain good credit just by having good habits as a consumer, and you’ll thank yourself later when your job as an investor is both easier and more profitable. Before we get into that, however, it’s important to understand what exactly goes into a credit score because you’ll then have an easier time maintaining yours. There are five primary pieces of information that are considered to determine your credit score: payment history, level of debt, credit age, mix of credit, and recent credit. We’re going to outline a few practices to help you keep these in mind:
Pay Your Bills On Time, All The Time
We can’t stress this one enough. Obviously, you need to pay credit card and mortgage bills on time, as well as make sure you’re regularly paying down the balance of any outstanding loans in a regular and punctual manner. Your timeliness, or lack thereof, in paying such bills has a direct effect on your credit score. While utility bills and things like car insurance bills don’t affect your credit score provided you pay them on time (as in, you don’t improve your score by paying them), if you fall behind on those bills it will have an effect on your score. Therefore, the best practice is to pay all of your bills on time, every time, all the time.
Only Apply For Credit When You Need It
We’re going to expand on this in a minute because it has to do with your credit history, but when you apply for credit, credit scores look at your recent credit activity as an indicator of your need for credit. What this means is if you apply for a lot of credit over a short period of time, it may appear to lenders that your economic circumstances have changed for the worse and they’ll be more likely to see you as a risky borrower. Further, each time you apply for credit, your score takes a hit. Therefore, the best practice is to apply sparingly, when you need it, and avoid giving off the perception of unpredictability or anything that may indicate increased risk on the lender’s part, which brings us to our next point:
The Longer Your Credit History, The Better Your Score
Obviously, we’re talking about a credit history that’s more or less good over the long run. Having a long and bad credit history isn’t going to do you any favors. Another way of thinking of this is as your “credit age.” Much like age in humans, we often associate experience and, hopefully, wisdom with increased age. That’s exactly how lenders will examine your history when you apply for credit; the longer your history is, the better they’ll assume you are with handling debt and therefore will see you as a lower-risk borrower.
Keep Credit Card and Other Debt Balances Low
If you have a credit card or a line of credit attached to an existing property while you wait to sell it, you’ll want to keep your balance at 30% or less of your limit. Exceeding 30% of the limit at any given time is risky anyway, even if you plan on paying off the entire balance when your next statement comes in, but more to the point, credit issuers report the outstanding balance when your statement closes and the higher the balance, the more it adversely affects your credit score. This is a form of managing your debt that will help with your overall credit score, because the more outstanding debt you have, the worse it will look on your credit report.
Don’t Close Old Credit Cards
When you close an old credit card, the issuer stops reporting it as inactive accounts have less weight than active ones. After 10 years, the credit bureau will remove that account from your score. While this seems innocuous, the removal of a 10-year credit account lowers your average credit age, and as we discussed earlier, having a higher credit age is a plus for your credit score.
Finally, be sure to check your credit score regularly. Just because you have good practices doesn’t mean that you may be missing something, or worse, that someone may have gotten a hold of your identity and is wreaking havoc on your score. By checking it regularly, you’re able to stay on top of things and be vigilant against fraud. Check in with us every week for more tips and tools of the trade when it comes to real estate investment, and be sure to follow us on Facebook!
– Get It Right Solutions