Tag Archive for: fico credit score

Credit Scores Explained


Credit scores and loans

Understanding credit scores is critical in your journey as a real estate investor.

Lower credit scores mean you might not get a loan you’re applying for. Or you might have to put more money into a deal. If you have a bad credit score, you’ll typically see higher rates or terms which make dealing with the market frustrating. 

If you’re a real estate investor or even business owner, it’s okay to use your personal credit for your business. But it’s absolutely critical for you to understand how credit scores work.

Using personal credit works, but you want to be careful not to run it up to where you’re handicapped with higher rates. Higher rates quickly turn into higher down payments and costs overall. 

You want to build your credit score so it works for you instead of against you.

How Credit Scores Work

Credit card usage is the leading reason we see for low credit scores.

Surprisingly, the amount owed doesn’t affect the score nearly as much as the ratio of usage compared to the available balance.

For example, if two people owe $1,000 on their credit cards, you might expect similar credit scores since they owe the same amount. But that isn’t how it works!

Their FICO credit score will reflect the difference in their credit limits. 

Here’s how it works:

Let’s say Person A has a credit limit of $2,000, resulting in a 50% credit usage ($1,000 owed divided by $2,000 credit limit). In contrast, Person B owes $1,000 but has a credit limit of $5,000. Person B then has only a 20% credit usage ($1,000 owed divided by $5,000 credit limit). 

FICO and other credit-rating agencies consider credit usage ratios when determining credit scores. They want you to use your credit cards, but not too much. Therefore, FICO will typically raise your score when you have usage between 20%-30%. 

This can get complicated, and we recommend moving everything to a business credit card. Keeping your personal credit score separate from your official investing credit can save significant stress if your personal score dips.

If you do choose to continue using your personal credit for your business, it’s important to make sure you understand how usage affects your score.

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How do they come up with your FICO credit score? And why is it such a big deal?

Usage is a big deal when it comes to your credit score.

But it’s not the largest factor in determining your credit score.

Let’s go over what parts make up your FICO credit score.

What Makes Up My FICO Credit Score?

What’s the biggest factor in your credit score? 

Your payment history accounts for 35%.

Are you making payments on time? Are you skipping payments? If so, this will tank your FICO credit score.

If you’re a real estate investor or business owner who does not have a good payment history, then there’s only one thing that can help that: Change your habits. Make all payments on time.

The next biggest factor, at 30% is credit usage. Credit usage and payment history together make up 65% of your credit score.

Here are all the other considerations that go into your FICO score:

  • Credit History: How long you have had credit? – 15%
  • New Credit: How many new accounts and inquiries? – 10%
  • Credit Mix: Do you have a variety of types of debt? – 10%

Pay Attention to Usage

If you’re paying your bills on time, then usage is the largest factor in your credit score.

But how do you keep real estate investment project and your business moving along without being able to use your full credit limit?

One suggestion to this problem is to move those personal cards over to your business. This way, you can still use them, but you don’t have the negative impact on your credit score.

How to Help Your Credit Score

Leverage is king for investors. A major factor in getting leverage and loans is your credit score.

A low FICO credit score is a costly issue for investors.

Check out these other tips to quickly raise your credit score on our YouTube channel.

Send us an email anytime with questions about your credit and real estate investing loans at Info@TheCashFlowCompany.com.