Tips to Improve Your Credit Score Before You Finance an Investment Property
Credit scores are vital when it comes to obtaining long-term real estate financing, because your credit score indicates to potential lenders your willingness and ability to pay your debt obligations. Oftentimes, people do not think about their credit score until they get turned down for a loan. Although the damage may already be done by that time, there are actions you can take to proactively help improve your credit score quickly and easily for both the immediate term and the long run.
Pay attention to the balances on your credit cards.
The balance on credit cards matters, even if you pay them off in full each month. One of the main factors that determine your credit score is the amount of revolving credit you are using, compared to the total amount of revolving credit available to you. Smaller percentages are better for your overall credit score. Aim for 30 percent or less.
If you cannot afford to pay off your credit cards in full each month, then focus on paying down your balances and keeping them below 30 percent of available credit each month to help boost your credit score. Focus on only one credit card at a time, while making minimum payments on the rest.
Start with the credit card that charges the highest interest rate, then once it is paid down to 30 percent or less, move to the card with the next highest interest rate, and repeat until all of your credit card balances can stay below 30 percent. Once you have achieved this threshold, then work towards paying off all of your credit cards in full each and every month. This is the best method to eliminate credit card debt AND improve your credit score.
Focus on eliminating credit card balances completely.
One of the easiest ways to give your credit score a boost is to eliminate credit card balances and keep them gone. One of the factors that contribute to your credit score is the number of credit cards that have a balance on them. Therefore, if you have a number of credit cards that all have low balances on them, paying off the low balances and not using those cards anymore can help increase your credit score. Then choose one or two credit cards to use for all of your purchases and stick with those cards. In doing so, you can prevent cluttering up your credit report with numerous balances.
Even if you pay your balances off each month, it may still look like you have a higher utilization than you expect, because credit card companies report your statement balance to the credit bureaus. In those cases, paying your balances off each month isn’t enough. You still need to try and spend 30 percent of your available credit limit or less.
Keep the old debt around for longer.
Good debt, which is debt that you handled well and made the payments as agreed, is actually great for your credit score. The longer a good debt remains on your credit report, the better it is for your credit score. Even if an account is paid off, don’t close the account. Simply leave the account open and don’t use it – doing so will help boost your credit score.
Make the calendar your friend.
If you are looking for a loan, do all of your rate shopping within a short amount of time. Whenever you apply for a line of credit, it causes your credit score to dip down. That dip can impact your credit score for around a year. When someone applies at several different places for credit, it makes it look like they want to use more credit.
A FICO score tends to ignore any inquiries made within the 30 days prior to scoring. If some inquiries are older than 30 days, it counts those inquiries as a single inquiry. Depending on the credit score being used, the length of time for your shopping period will vary – for example, the new scoring software gives you 45 days, whereas older software gives you only 14 days. The key thing to remember is that you don’t want to wait around when shopping for a loan. Apply for and close on the loan as quickly as you can.
Pay all of your bills on time.
If you are looking to make a major purchase, such as investing in a property, you might be working to come up with a large amount of money at once. The last thing you want to do is start paying your bills late. Even if you have a large amount of money saved for your investment, all it takes is a little drop in your credit score to cancel the financing for your purchase. One of the key elements of a good credit score is being able to pay your bills on time month after month.
Your credit score is determined by the information in your report. If you don’t pay your bills on time, it will damage your credit and cause your credit score to drop. Even items that aren’t normally associated with a credit report (such as medical bills) could appear there if you don’t pay the debt. While the original creditor might not report your non-payment, they may sell the debt to an outside collection agency, who won’t hesitate to put the information on your credit report and come after you for the debt. While saving money, or even if you have the cash on hand for your investment, don’t forget to pay your normal monthly bills in the process.
Don’t give the impression of risk.
Missing a payment or suddenly paying less than you normally do could be a red flag to lenders. While there are other things that could concern your card issuer, they won’t affect your credit score. For example, taking out a cash advance or using your cards at certain types of businesses could indicate that you are struggling to make ends meet. Don’t do anything that could signal a problem, even if there isn’t one to begin with. Even just the possibility of a problem can be enough to signal a red flag to a lender.
Dispute Inaccuracies and Errors to the Credit Agencies.
If you notice inaccuracies or an error in any or all of your three credit reports, call the credit reporting agency responsible and dispute the report. The credit bureau and the company that reported the disputed item will communicate regarding your dispute and send you a final verdict. The credit bureau will notify you that the disputed item on your credit report was either modified, verified and not removed, or that it will be removed from your credit report. Remember that it can take up to 45 days to receive a verdict, so report any issues with the credit bureaus well before applying for a loan for your investment property.
By going through the tips above, you can make sure your credit score is where you need it to be so you can walk away with the loan you need to get the investment property you desire. It might take a little time, but you can be on the way to boosting your score in no time and keeping it up when you follow the same tips each month.
Scott Clift is a licensed real estate broker with Westpark Equity Group and the private lending division of Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specializes in providing real estate loans for real estate investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at 844-574-LOAN (5626) or by visiting westparkloans.com.