If you plan on making any major financial investment including investing in real estate, then you’re going to need to learn about credit. Of course, as a real estate investor, the questions you’re most concerned with are: “What is a good credit score?” and “How does it impact your investment decisions?”. Before we get into the answers, let’s backtrack and discuss what exactly a credit score is.
What is a credit score?
A credit score is a three-digit value, based on various factors, which assesses the creditworthiness of an individual. And you thought your report cards were important!
Credit scores are important for various financial investments and purchases. Things like opening a new credit card, buying a new house, purchasing a new car, and even switching to a cell phone service provider are all impacted by one’s credit score.
While there are many types of credit scores, many of which are industry-specific, there are two common scores to be aware of. The most common type of credit score is the FICO Score. The second most common is the VantageScore. With the latest VantageScore system, both scores range from 300 to 850.
Before we delve into what is a good credit score, it’s important to know what factors affect credit scores. As previously mentioned, different types of credit scores exist. While the types of scores can be different, the factors that influence them are largely the same. Each factor mentioned includes a percentage of its impact on FICO Scores.
Payment History – 35%
This factor is the most influential for both FICO Scores and VantageScores, which is why it is the part most people mess up on. Points are earned by paying off for things on time. Conversely, paying for things late or missing payments altogether will make you lose points. Having public records including bankruptcies and civil judgements will also deduce points from your credit score. When these issues are resolved, points are regained.
Outstanding Balances – 30%
Having multiple revolving credit accounts will improve your credit, if the accounts themselves have good credit. Using that credit should be at a balance. Using more than 30% of the credit on the account will result in losing points. Try to use less than 30%, or better yet, 20% of the available credit.
Length of Credit History – 15%
The more of a credit history veteran that you are, the higher your credit score can be. This also assumes the longevity of not having issues with that credit. Keep your accounts old, yet prosperous, for better credit.
Types of Accounts – 10%
You can have a higher credit score for having a wide range of accounts. For instance, using different kinds of loans (like college loans and home loans) will diversify your account, leading to a higher credit score.
Credit Inquiries – 10%
Checking your credit costs points. Different purchases, like a property or a vehicle, will require credit checks. Do not have your credit checked too often to avoid losing points.
Now we can move on to what is a good credit score.
What is a good credit score?
The previous five factors contribute to what is a good credit score. Since there are different types of credit scores, what is a good credit score will vary from type to type. In the FICO Score, a range from 670 to 739 is considered a good credit score. Past that range, 740 to 799 is considered a very good credit score, and anything above that up to 850 is considered excellent. On the flipside, a very poor credit score is from 300 to 579, and a fair credit score is from 580 to 669.
The good credit score range is more restricted in the VantageScore. In the VantageScore, a score from 700 to 749 is considered a good score. From 750 to 850 is an excellent score, 300 to 549 is a bad score, 550 to 649 is a poor score, and 650 to 699 is a fair score.
Answering the question of what is a good credit score needs to take perspective into account. The good credit score ranges mentioned can qualify for different investments and purchases. In terms of real estate investments, the required score is around 620, but a very good score is at 720 or higher.
Why is it important for real estate investors?
Having a good credit score has significant implications for potential real estate investors. It boils down to a few things:
1. Shows you are more qualified and thus speeds up approval
Your credit score helps lenders assess how qualified you are financially. Specifically, lenders are interested in finding out how likely it is that you will be able to pay back the loan or mortgage in time. Therefore, a higher credit showcases less risk for lenders. Credit scores are often referred to as risk scores for this reason.
2. Higher Credit = Lower Interest on Loans
As a result of the previous point, having higher credit speeds up the approval process, places you and the lender at lower risk, and thus gives you lower interest on loans and mortgage.
3. Better Terms of the Loan
Having a high credit can give you leverage in the negotiations with the lender. Remember, the lender is also concerned with high credit, not just you.
Awesome, so now you know what is a good credit score, but what if you actually have bad credit? After all, everything we’ve said so far means that building up a good credit score takes time, and buying investment properties with no money is not always a viable option. Thus, you may want to consider how the FCRA Section 609 Credit Repair Method might help you improve your credit score with this DIY guide published by Credit Zeal.
All in all, it’s extremely important for every investor to know what is a good credit score and how to achieve one. The harder part is actually taking the time and putting the effort to do so. If you’re a young real estate investor, try to establish credit as soon as you can.
For more on what is a good credit score and loads of other real estate topics, check out Mashvisor’s blog. If your credit is good and you’re interested in purchasing a property, do yourself a favor and start your Mashvisor trial!