Maintaining a good credit score is essential if you’re planning on purchasing a new rental property, especially if you’re planning to invest in an expensive city such as Palm Beach or Bal Harbour. Among other qualifications, lenders will review your credit score before you can obtain financing for your next real estate investment. In big cities where the competition is high, having an impressive credit score can increase your chances of landing your dream rental.
What is Considered a Good Credit Score?
FICO, or the Fair Isaac Corporation, has set the standard for the U.S. credit scoring system. Most lenders determine an individual’s creditworthiness by evaluating their FICO score.
According to the FICO, a “good” credit score ranges from 670 to 739. Scores that belong to this range are highly favored. Meanwhile, scores from 580 to 669 are considered “fair”, and those ranging between 740 and 799 are “very good” scores. Exceptional scores are those above 800.
Credit score requirements vary from lender to lender. In general, the higher the loan, the higher the standards will be. However, maintaining a higher credit score (700 and above) can qualify you for lower interest rates, down payments, and so on.
Best Ways to Maintain Good Credit
Bad credit can prevent you from purchasing your next rental property. This is why it’s crucial to use credit responsibly — if possible, start building good credit from your first credit card. Here are a couple of ways to maintain a credit score that lenders will love.
#1 Don’t Buy What You Can’t Afford
Just because you have a $22,000 credit limit does not mean you should spend beyond your means. Buying things that you can’t afford is the quickest way to fall into debt.
Make it a habit to use your credit card only for things that you can afford. You will find it easier to pay your monthly payments if you limit your spending. Your credit score will suffer if you keep maxing out your credit card without paying them off. To be safe, it’s best to maintain a credit utilization rate of 30% — this means that if you have a $1,000 limit, you should spend only $300 or lower.
#2 Pay Bills Before They are Due
One of the easiest ways to tarnish your credit score is by paying late. According to the FICO, on-time payments account for 35% of your credit score.
Late credit card payments will negatively affect your credit score, making it more difficult to obtain loans at low interest rates. Also, most lenders are reluctant to fund investors who have a history of late credit card payments. This simple yet effective solution can help you demonstrate your ability to responsibly handle your financial obligations.
#3 Start With Only One Credit Card
If you’re a first-time credit card user, it’s wise to start with one credit card. It can be tempting to start a credit card collection, but don’t make this common mistake! The more credit cards you have, the harder it will be to keep track of your payments and available balances.
In addition, even though credit inquiries have a very minimal impact (only 10%) on your FICO credit score, each inquiry will remain in your credit report for 2 years. It’s not advised to apply for multiple credit cards as this will put your credit score at risk of taking a hit. In general, a single credit inquiry removes around five points off of your FICO credit score.
#4 Become an Authorized User on a Friend’s Card
If you need to quickly build credit, you can request a family member or friend to add you as an authorized user. Being an authorized user is an excellent way to build credit — but only if the primary cardholder makes on-time payments! This is one way to “ride” on their good credit history.
If you have a bad credit score and you want to improve your credit, getting added as an authorized user can boost your FICO credit score. Users with poor credit scores (below 550) can increase their credit scores by up to 10% in a month.
#5 Get a Business Credit Card
Another way to maintain an impressive credit score as a property investor is by opening a credit card solely for business. Separating personal and business expenses is an excellent way to keep track of your total balance. Many property investors find it easier to manage their monthly financial obligations by using one credit card that’s dedicated to business. This way, you won’t have to review your monthly billing each month to manually separate your expenditures.
#6 Review Your Credit Report
Every credit card user is entitled to free credit reports from Experian, Equifax, and TransUnion. Take advantage of this by reviewing your credit report — errors are more common than you think!
Go over your credit reports carefully and look for inconsistencies and inaccurate information. Remember, your credit reports are what your lenders will see. It’s where their lending decisions are based on. This is why it’s crucial to regularly review your credit reports. If you notice anything that seems off, you should promptly file a dispute with the credit bureau.
#7 Pay Off Your Debt
Debt accounts for 30% of your credit score, so you should start paying it off as soon as possible. This is easy to do if you have a positive cash flow. In that case, start paying off your credit card debt on the account with the highest Annual Percentage Rate (APR) or interest. Use the extra money to make minimum payments on your lower-interest other cards, if any. Once you’ve completely paid off your debt on one card, move on to the next.
However, if you have a negative cash flow, meaning you’re making less than what you owe, you’ll have to get creative. For instance, if you own multiple property investments, you could consider selling one of them to pay off your debt.
By maintaining a good credit score, you can purchase more rental properties, thus keeping your real estate investment goals on track. If you need financial advice, Luxury Property Care can help you manage your finances so that you don’t end up in debt. We’ll work with you to come up with a long-term strategy to help you become the successful property investor you aspire to be.