You’ve certainly heard a lot about Credit Score and might even have a general idea about its meaning, but if you came to this page you still have some doubts about what is a credit score and we hope to answer it through a real estate prism.
Say you want to borrow some money from a bank. That bank needs to know if they can trust giving their money to you. If you are a responsible person or if you’re just going to spend it and never pay it back. They cannot ask your friends or neighbors about it because even if they give their honest opinion; they can’t rely on opinion, right? So our financial institutions came up with a system designed to protect our financial structure; we call it credit. So, what a credit score does is to position individuals on a scale of trust-do not trust this person with your money.
How does it do that?
Through data management. Whenever a creditor, government authorities, landlords, employers or others who need to know if we are financially responsible are about to get in business with us, they request a credit report to a consumer credit reporting company. This company is constantly collecting information sent by banks, utility companies and several businesses regarding our relationship with them: did we pay our bills in full? In time? Did we spend more than we should? After gathering that data, they assert our financial responsibility level, and a produce a credit report. And what is inside it? Our credit score!
A credit score is never definitive; it’s constantly changing. It usually covers about 7 to 10 years of our lives, so, if you did something really irresponsible, like defaulting a mortgage or something, in 7 to 10 years it will probably stop affecting your score. That’s a curse and a blessing because it means that every little thing can benefit you in the long run. And a good credit score is a long run game.
A credit score is generally measured by a combination of factors:
10% of it is for new credit you get approved to
10% of it is for your credit mix (1 credit card, 1 student loan and 1 mortgage loan > 3 credit cards)
15% of it is for the length of your credit history
30% of it is for everything you owe
35% of it is for your payment history (in full and in time)
And it usually spans from 300 to 850. From 700 up it is considered a good credit score. For Real Estate, if you're applying for a mortgage loan, this is the range you wish to be on. But depending on the moment of the market, you might get it even if you're on the "fair" section of it (around 650-700). When renting, a fair credit score is usually enough; however if the market is hot and the Landlord has a lot of offers, he might favor someone that has a better score than yours. If you're a real estate investor - especially a novice real estate investor without a big history of real estate investments - having the highest credit score you can help make things not only better - with the possibility of negotiating a lower interest rate - but faster too. Lenders have to assess their risk and avoid it the best they can, so, when a credit report brings them a great score, their decision making gets easier because their risk lending you money is reduced. So, as a rule of thumb, always try to improve your number. It will help a lot! Not only in Real Estate but in all areas of your life.