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How Is My Credit Score Calculated?

Real estate investing gets a whole lot easier when you understand your credit score.

There are a couple different types of credit scores, but the numbers we’ll use here reflect FICO scores (the most widely used credit score for most lenders).

Credit scores range between 0 and 850. More than 740 is great, and a score of less than 700 begins to limit your options.

This number is calculated by looking at five main pieces of information:

  • Credit mix
  • New Credit
  • Credit History
  • Payment history
  • Amounts owed

Credit Mix

Close to 10% of your score is based on the mix of credit you already have.

Do you have seven credit cards?

Or zero?

Do you have a car payment, a mortgage, student loans, personal loans?

Typically, the more diverse your lines of credit are, the better it is for your score.

New Credit

Around 10% is based on “new credit,” or how often you get credit inquiries or open a new line of credit.

New credit can temporarily lower your score. So for example, if you buy a new car, you’ll probably have trouble securing a loan for a property right away.

Length of Credit History

About 15% of your score is calculated based on how long you’ve had your lines of credit.

If you opened your first line of credit less than 5 years ago, you’ll have a lower score than someone whose credit is 40 years old.

Amounts Owed

These last two categories are the most important. They make up two-thirds of your credit score.

About 30% of your score is determined by something called amounts owed. Amounts owed is about your debt. More specifically, it’s about how much of your available credit you’re using.

For example, let’s say your credit card has a max of $1,000. You buy a new set of tires and brakes, so now you owe $1,000 on your card. You’re using 100% of your $1,000 limit – you’re maxed out.

The story creditors see when they look at you is that you’re not managing your credit well. They’ll assume you won’t manage other loans well either, so you get a lower score.

But let’s look at another situation.

Say you got a different credit card with a max of $5,000. That same borrowed $1,000 has a way different effect on your credit score. You’re only using 20% of your credit line, and you’re leaving 80% at your disposal. Creditors like that story. So you get a higher score.

Payment History

The biggest amount of your score, up to 35%, is based on your payment history.

Payment history is exactly what it sounds like:

  • How are you paying your bills?
  • Do you always pay on time?
  • Have you had any bankruptcies?

Financial institutions can see this information, and it’s the top factor they consider. At the end of the day, lenders want to know: Will you pay them back? On time?

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How Your Credit Score Can Make You Thousands of Dollars

How to Make Money with Your Credit Score

How to Make Money with Your Credit Score

Today, let’s chat about how to make money with your credit score.

Your credit score is kind of like a baseball game. With it, you can knock it out of the park and enjoy great success with your finances. Or you can strike out, and--well--lose (ouch).

 

When you “win” the credit score game, you win countless opportunities. These include:

  • The best interest rates
  • Affordable loans
  • And, in the end, hundreds of thousands of dollars.

Yes, you read that last one right. Hundreds of thousands of dollars. Because a good credit score means cheaper rates. Which means cheaper bills. Which means you save A LOT of money over the years.

Before we go on, let’s talk about what a “winning credit score” look like.

Winning Credit Score

Most lenders like to see scores in the 700’s or higher. Anything lower will likely lead to rejections and expensive rates.

But what if you have a score under 700? Nobody wants to walk up to the plate and strike out, right?

Well, let’s take a look at 3 strategies to help you prepare for this financial ballgame.

Increase Your Available Credit

Pick up the phone and call your credit card company so you can apply for a higher limit. Why? Because then it’ll be easier to keep your credit usage at or below 30%.

What do we mean by that? Well, let’s take a look.

If your credit card balance is $8,000 and you have a maximum credit line of $10,000, then creditors can see you’re using 80% of your available funds. Yikes! In their critical eyes, this means you’re a risk--a BIG one--and you might not be able to meet your financial obligations (i.e. you won’t be able to pay them back).

Not good.

Now, if your credit card balance is $3,000 and you have a maximum credit line of $10,000, then creditors see you’re only using 30% of your available funds. That’s much, much better. In fact, it could be a home run in the eyes of lenders.

Because when you manage your credit usage, creditors will think you’re financially responsible. AKA, you pay your bills. And that will lead to more loan approvals and lower rates.

Yay!

Pay Extra

A large chunk of your credit score revolves around your monthly reported balances to the credit bureaus.

So, it always helps to pay extra on your credit cards before your next statement. If you do this, the credit bureaus will be happy with you. Very happy! That means your score will rise.

Now, if those first two strategies don’t work for you, then you can always take a more creative third approach (one we’ve recommended to many clients).

Get a 60 to 90 Day Note

Basically, you can get a loan to pay down or pay off your credit cards. You can get one from a bank, a family member, a friend, or a private lender. This way you can keep your real estate projects moving along and your cash flow, well, flowing.

Make Money with Your Credit Score

If you take one, two, or all three of these steps to boosting your credit score, then you’ll have a much better chance of getting lower rates and generating thousands of dollars over time.

And if you play the game right, you can knock it out of the park and make hundreds of thousands of dollars!

Happy investing!