According to a 2016 Princeton Survey Research Associates study, “as many as 34 percent of Americans have never even checked their credit reports.”
If you are in the real estate investment industry, you should hope this isn’t you. But knowing the value of your credit score is not enough. It’s essential that you also understand what this number means and how it can be used.
What is a credit score?
Your credit score is a 3-digit number which represents your overall risk profile. That is, how likely you are to default on any future loans. It’s assigned to you by one of the three major credit bureaus in America – Experian, TransUnion and Equifax.
What determines your credit score?
According to the Consumer Financial Protection Bureau (CFPB), your credit score is based on the following five factors:
Length of credit history (15%) – this refers to your average account age
Payment history (35%) – this refers to timeliness and any past defaults
Amounts owed (30%) – this refers to your current debt to credit limit ratio
Types of credit used (10%) – this refers to your mix of credit
New credit (10%) – this refers to any new or recently submitted applications
What is your credit scored used for?
The main purpose of a credit score is to demonstrate whether you are a high or low risk borrower. This comes down to your money habits up to this point. It will identify if you are someone who:
Pays bills on time
Pays bill in full
Doesn’t max out credit limits
And so on.
All of this helps the lender to determine if they will approve or decline an application. If approved, it can also affect the terms of the agreement (i.e. interest rates).
What happens if I have a low credit score?
If you have a low credit score, you may experience the following:
Subject to higher interest rates – High risk leads to higher interest rates than your low-risk counterparts. Of course, this means you will end up losing more profits to interest expenses. You must consider how this will affect your bottom line.
Lower eligibility for funding and other perks – You may find that you have limited access to certain sources of funding. Also, you may be restricted from perks offered to those with higher credit scores.
How credit scores affect your real estate investment business
By now it’s clear that you want to have a high credit score – especially as a real estate investor. Here are some specific ways it impacts your business:
Loan Qualification – the size and types of loans you qualify for
Loan Approval – the frequency of approval
Rates Offered – the interest rates and payment terms
Profits – the bottom line impact of interest fees
Headache – a low credit score can be a constant battle
The bottom line is that it always helps to have a higher credit score. From lower interest rates to higher approval rates, you really can’t go wrong. Even if you currently have a low credit score, there are many ways to start building your credit again.
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