5 Underrated Ways to Boost your Credit Score as a Real Estate Investor
Your credit score is one of the most important indicators of your financial well-being. Lenders use credit scores to quickly assess a borrower’s ability to handle new credit. Most people don’t have cash available to fund large purchases such as a home, car, or college tuition. These investments usually require some form of financing, so it's in your best interest to keep your credit score high.
Not only does having a good credit score increase your chances of getting approved for certain types of financing, but it also helps you secure lower interest rates and favorable loan terms. This could reduce the financial burden of having to borrow funds.
If you plan on investing in real estate, then having a strong credit history is a must. Once it dips, it can take time to bring it back up. It could even affect your ability to acquire more properties in the long-run. This is especially true if any delinquent accounts pop up on a credit check, since they stay on your credit report for up to seven years.
There are several actions real estate investors can take to raise your credit score such as paying your bills on time, paying off credit card balances in full, and monitoring for and disputing any errors on your report. But, there are a few lesser-known strategies you can implement to improve your credit.
Why should real estate investors care about credit history?
Your credit score is incredibly important. The closer you can get to a FICO score of 850, the better. While you don’t need an excellent score at all times, you should be striving for one. A high credit score facilitates the approval process on any future loan you may request.
The interest rate at which you borrow is essentially the price you pay for borrowing money from the bank. Individuals with good or excellent credit scores can save significant amounts of money on interest. Real estate investors in particular could potentially save tens of thousands of dollars throughout their lifetime.
Those with superior credit ratings are considered lower-risk borrowers, which prompts banks to compete for their loan applications. This competition among banks results in better rates, reduced fees, and additional perks for the borrower.
On the other hand, individuals with poor credit scores are seen as higher-risk borrowers, resulting in fewer lenders interested in their business. A low credit score could even prompt lenders to impose higher annual percentage rates (APRs) as a consequence.
Lesser-known strategies to improve your credit
While you may not be able to boost credit score overnight, you can improve your credit score relatively quickly. Here are a few ideas:
1. Use and pay off credit cards strategically
Credit utilization is the amount of credit you’re actively using. It’s recommended you use less than 30% of your limit on each card, with lower utilization being even better. The highest-scoring individuals typically maintain a credit card debt utilization rate of less than 7%.
The impact of credit utilization on your credit score is strong. It’s the second most important factor after your payment history. Having a healthy credit mix is also important to any credit bureau. If you have multiple lines of credit available, aim to use less than 7% and no more than 30% on each one of your credit card accounts.
One simple approach to keeping your account balances low is to pay down your account balances before the billing cycle ends. You could also make multiple payments throughout the month, either once a week or twice a month, to consistently maintain a low balance.
Setting calendar reminders to log in and make payments might help. You could also set alerts on your credit card account which will notify you when your balance reaches a certain threshold.
Reducing your credit utilization can bring up your credit score relatively quickly. As soon as your credit card reports a lower balance to the credit bureaus, the reduced credit utilization rate will be taken into account when calculating your credit score.
2. Become an authorized user on a separate credit account
One of the simplest ways to establish credit without incurring any debt is to become an authorized user on a long-standing, high-limit credit card belonging to a family member or close friend. As an authorized user, you’ll benefit from the primary account holder's credit history.
The card's activity, including purchases made, is reported on your credit reports. This strategy can be beneficial for building credit from scratch or improving a poor credit history. Additionally, it can increase your available credit and lengthen your credit history, which are also contributing factors to your credit score.
It's worth mentioning that you don't necessarily need to have physical access to the card or even use it for it to reflect on your credit reports. As long as the primary cardholder uses the card responsibly and makes timely payments, your credit score should improve. On the other hand, if the card is maxed out or payments are missed, it could negatively impact your score. Therefore, it’s important you choose a person you can trust to use their credit responsibly.
It's also important to understand that being added as an authorized user may not have as significant an impact on your credit score as other methods. Credit bureaus assign less weight to authorized user status because you are not the one responsible for repaying the debt. Nevertheless, becoming an authorized user on someone else's credit card can still raise your score a few points, particularly if you have a limited credit history.
3. Ask for higher credit limits on current accounts
When your credit limit increases while your balance remains the same, it has an immediate positive effect on your overall credit utilization. As mentioned above, a lower credit utilization ratio has the potential to improve your credit score. You might be able to obtain a credit limit increase by proving an increase in income to your credit card company, or by adding more years of positive credit history.
The impact of this strategy is highly influential, as credit utilization plays a significant role in credit scores. Contact your credit card issuer and ask about the possibility of obtaining a higher credit limit. This credit-improving strategy is pretty efficient. Once the higher credit limit is reported to the credit bureaus, your overall credit utilization will decrease. The key is to not use the extra credit “room” on the card. It takes some discipline but it can certainly be done.
4. Take out a credit-builder loan
Credit-builder loans are specifically designed for individuals with no credit history or poor credit. They work differently from traditional loans, operating more like a forced savings account.
Here's how credit-builder loans typically work: You borrow a small amount of money, usually ranging from $300 to $1,000. The borrowed funds are held as collateral by the bank in a deposit account, such as a certificate of deposit (CD). Over the course of approximately a year, you make regular installment payments towards the loan. Once the loan is fully repaid, the funds in the account are released to you, along with any accumulated interest.
It's important to note that credit-builder loans are not provided without any costs. Typically, the lender will impose an administrative fee and/or interest charges. Therefore, it's crucial to compare the costs associated with different credit-builder loan options before agreeing to one.
Credit unions usually offer favorable terms for these loans and are worth considering. Despite the fees involved, obtaining a credit-builder loan can be worth it, particularly if you need to establish a positive credit history.
5. Report rent payments to the major credit bureaus
Lastly, another way to improve your credit score could be by reporting your rent payments — which are a major monthly expense that’s not typically included in credit reports. However, rent reporting services like Azibo Credit Boost can report your on-time rent payments to the major credit bureaus.
Whether rent payments are factored into your credit score or not, having rent records on your credit report can still be beneficial if potential creditors review them. A lengthy history of consistent rent payments demonstrates your ability to responsibly handle your finances and could have a positive impact on a lender’s decision-making process.
Use Azibo Credit Boost to boost your credit score
At Azibo, we recognize the importance of credit scores for both real estate investors and tenants, which is why we built Credit Boost, our rent reporting tool. By paying your rent through our platform, Azibo can efficiently and seamlessly report your on-time rent payments to the major credit bureaus.
Improving your credit score helps you gain access to lower interest rates for mortgages, car loans, and other consumer loans. It can also increase your chances of obtaining higher credit card limits so that you can make large purchases for your real estate business. For tenants, an improved credit score enhances your prospects when it comes to selecting a new home to rent, and can potentially lower your required security deposit amount. Take advantage of these underrated strategies to boost your credit score.