How can you build your credit to help you win in the real estate market?
Your credit score affects everything in your journey as a real estate investor. Without the leverage of a good credit score, you’ll be stuck behind the big players of Wall Street.
Why is Building Credit so Important for Real Estate Investment?
Lower scores mean you might not get a loan, or you might have to put more money into a deal. Often, you’ll see higher rates or terms which make dealing with the market frustrating.
So if you’re a real estate investor or even business owner, and you’re using your personal credit for your business, you need to understand how to build your credit to take you to the next level.
Using your 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 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, it’s not the amount owed on credit cards that matters most; it’s the usage compared to the available balance.
For example, if two people both owe $1,000 on their credit cards, you might expect their credit scores to be equally impacted 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 takes a dip.
How to Build Credit
1. Don’t close credit cards you’re not using.
You can cut them up so you can’t use them anymore, but let them keep reporting. Credit bureaus see the extra available credit which helps build your score.
Earlier this week we had a client call whose usage was in the high 30s. Even though that isn’t much higher than the ideal, it still impacted his credit score and bumped him down a tier, making him pay higher rates and potentially decreasing his loan to value with major lenders.
He had other credit cards available, but he closed those accounts. By closing them, he decreased the available credit overall which made his usage percentage go up and his credit score go down.
If he had only left those credit cards open, he would have kept a much higher available credit which would have brought his usage numbers down.
2. Increase your limits to build your credit.
You can also call and ask your credit card companies to increase your available credit. Since credit scores are based on the ratio of usage to available balance, raising the ceiling builds your credit.
It’s important to remember that increased limits don’t show on your credit reports until your next statements cycle. If you’re desperate to raise your score, look at when your next statement is issued to avoid panic.
3. Protect your credit through private investments.
By finding individuals in your community who are willing to invest in you, you can build your credit through avoiding credit cards. Paying cash helps you avoid raising your usage number.
It doesn’t take a millionaire to make this happen. Even ordinary people who have $20,000-$50,000 can make a significant difference.
You’re helping them, and they’re helping you, because they’re not going to find an 8-9% rate anywhere else. Just make sure you take care of their investment by properly securing it.
How We Help
Our goal is to make real estate investing easier, faster, and cheaper for everyone!
If you have questions about how to build your credit, we’d be glad to help. Just reach out to us at Info@TheCashFlowCompany.com.
Want more information about real estate investing in general? Check out our YouTube channel.