It is said that a good reputation proceeds you. This is especially true as you begin your endeavor as a real estate investor. Beginning today, intentionally start crafting the reputation you desire as an excellent credit customer.
As Chief Financial Officer of your own real estate investment company it is important to begin to understand how to obtain and manage credit. Many people know their credit score but do not understand how it works or the role they can play in creating the right score. By having the “right score” you will have opportunity to borrow at cheaper rates thereby lowering your cost of borrowing.
Traditionally there are five components that are reviewed.
• Payment history
• Amount of debt
• Length of credit history
• Types of Credit
• Recent Credit Inquiries
Each of these components are weighted differently in their consideration. The payment history holds the most weight at 35% as it demonstrates your actions in managing credit. The second most weighted item at 30% is the amount of debt you have in your portfolio.
Lenders will look at this as an indicator of your credit health. A healthy debt to income ratio trends below 36%. The length of credit history is weighted at 15%. The final two come in at
Become a student of understanding your report, your score and how you can impact it. Begin by securing a copy of your score from annualcreditreport.com. You are entitled to one free credit report annually. You will have to pay, though for the score. Enlist the help of a trusted advisor such as your banker or your real estate mentor to begin to understand the components and what they mean.
Develop a list of scenarios and questions to aid you in understanding this report. For example, “what happens if I close a credit card verses letting it go dormant?” You will gain much more
understanding by utilizing the examples of pitfalls others have experience than just asking the question “tell me how to read my report.”
Successful investors take time to keep up to date on the market changes that will affect ability to finance deals. These include anticipated market interest rate fluctuation which reflect confidence in the market. One shift coming on the horizon in 2019 is a shift in the way the FICO scores are calculated. Historically the credit report only reviewed payment history shown by reporting agencies. With the new shift, applicants can choose which accounts they want considered when the score is calculated. Another change is including banking activity as a form of payment history.
Knowledge is power. Be well read, learn to ask intelligent questions and take active control of your credit reputation!