I was listening to the radio the other day, and a very well-known financial guru was talking about how to live without a credit score. As a commercial mortgage broker and investor, I can tell you that sure, it’s possible, but it will make your life so much more difficult.
C’mon Dave – oops, I mean popular financial dude that has a radio show and that shall remain nameless. Wake up and smell the 21st Century!
We can live without a lot of things. We can live without electricity, for instance. Mankind lived without electricity for thousands of years before Benjamin Franklin invented it. But why would we want to? I don’t even go camping, why would I want to live my daily life without electricity? I like those luxuries like lights and heat and appliances that electricity provides. (Oh, and please don’t comment about Ben Franklin, that was a joke. I know Ben Franklin did not invent electricity. We all know that Thomas Edison did).
My point is, a healthy credit score can make your life so much easier, especially if you are an investor. A credit score is a tool, nothing more. And like most tools, if used correctly it can be very useful. If used incorrectly, it can make your life more difficult than it needs to be.
Trying to invest without a credit score, or trying to invest with a bad credit score, well, it’s like living without electricity. It’s possible, I guess, but your investing career is going to be a rough road.
A good credit score can is the first thing most lenders will look at when considering your application. I don’t care if it’s a conventional Fannie Mae product, or an outside the box bank statement loan. Your credit score will drive the interest rate you get, may help you overcome other obstacles in your application, and may even be the reason that you get turned down.
Why? Why does it matter what your credit score is? You’re a good person, that’s found a great property and wants to get in the game. Why is the credit score so important?
Well, quite simply, your credit score is an indication of whether or not you pay back your debts in a timely fashion. Well, color me astonished, but I think that that lender that is considering loaning you half a million dollars might be interested in how you paid your debts in the past. Shocking, isn’t’ it!
Your credit score is important, whether we like it or not. So it’s really in your best interest to keep it healthy and get the score over 750. Once you get in over that number, the returns diminish as you go up. It’s all about bragging rights at that point (ooh, I have an 815 score, I think I should try walking on water).
Getting Your Score Up
So how do you get your score to a decent range? Well, glad you asked. Here are Jesse’s 5 things you can do to get your credit score up.
1. Pay Your Bills on Time. Rocket science, I know. This is probably the best and easiest thing you can do to start increasing your score. Lender’s want to see that you are paying your bills on time. They may forgive some other things, but this one is like the Holy Grail to them.
2. Pay Down Your Balances on Your Credit Cards. Your goal is to get your balances below 50% to start, and then below 30%. This will make a BIG difference on your score.
3. You Should Have 3-5 Credit cards. This seems to be the number that the credit agencies like. If you have more than that, don’t close them, just don’t use them. Get the balances down and put the cards in the freezer. Caveat: if the extra cards have yearly fees, ditch them.
4. Have One Installment Loan. Credit agencies like to see one installment loan on the credit report, like a mortgage or auto loan. I’ve seen many a credit score go down after paying off a car loan.
5. Ask for Forgiveness. If you have a couple late payments that messed up your score, ask the creditor to take them off. If they were isolated instance, you can send a letter to the bank or card company, tell them what happened, and politely ask them to take it off. May not work, but many times it does. Won’t know unless you try!
So yes, we live in a modern world and we invest in an environment where credit scores are important. So if you want your investment career to go a lot smoother, do yourself a favor and tend to your little garden called credit.