FICO is a publicly traded company whose most widely-recognized product is a credit rating score. The score is computed by taking numerous personal credit related statistics into account and turning them into a single number as a measure of how creditworthy an individual is. Because the vast majority of lenders (over 90%) use your FICO score as a key element in deciding whether or not to extend credit, FICO can have a big impact on your ability to invest in real estate.
There are, of course, ways to get around this issue. Those involve strategies like using non-FICO lenders, creating partnerships to strengthen credit, closing strategies that do not require you to assume ownership of properties and more. Regardless of any potential workarounds, though, there are many reasons that improving your FICO score as much as possible is in your best interests. The first step in doing that is understanding what sorts of behaviors that your FICO score will be positively and negatively affected by.
You are allowed to obtain a free copy of your credit report directly from each of the major credit bureaus (Equifax, Trans Union and Experian) at least once each year. Your FICO score will be included. Some of the bureaus will try to trick you into adding additional services (often in their online checkout) but be aware that they are required to provide you with a complete report at no charge. In other words, don’t fall for any tricks.
The largest single portion of your credit score (35%) reflects your payment history. This means that there is nothing you can do that will have more impact upon your score than paying your bills on time. It also means that if you have paid your bills late but you can work out an arrangement with your creditor to prevent them from reporting it to the credit bureau (or convince them to erase it from the credit bureau) that will probably be worth your while if your score matters to you.
The second largest portion of your score (30%) is something that most borrowers are surprised by. It’s called credit utilization, and it’s the ratio of your revolving credit limit to your current credit card debt. This is great news because it means that if you have a high amount of revolving debt you can immediately improve that portion of your score by paying off the debt (possibly by getting a non-revolving loan) or increasing your credit limits.
The next portion (15%) is determined by the length of your credit history. In other words, there is value in sticking with the same credit card company year after year. For this reason you should consider finding yourself a good one and then staying put.
The remaining 20% of your score is divided equally between two things. It is made up of the types of credit you use (10%) and your recent credit inquiries (10%). Using a wide variety of credit types (installment loans, charge cards, consumer financing, mortgages, etc.) can improve your score. Meanwhile, authorizing lots of creditors to examine your report can harm your score. (Just for clarity, your score is not impacted by “soft inquiries” where your credit report is accessed for non-credit related reasons like employment, insurance, credit management, etc.) Be aware that multiple inquiries in a short period of time for the same purpose (such as obtaining a mortgage) are supposed to be treated as a single inquiry by the FICO algorithm. If you suspect that you are being dinged for more than just the one inquiry you should contact the credit reporting bureau directly and discuss what can be done about it. The impact inquiries have on your report will diminish significantly after six months, and entirely after one year.
The higher your credit score the lower the risk you are deemed to be. If your score is higher than 750 you will have far more options should you want to borrow than if it is lower than 600. In addition the person with the higher score will probably pay a lower interest rate and might also have the opportunity to make a smaller down payment. The bottom line is that the advantages to improving your score are undeniable and can be very large. Having a good FICO score could easily make the difference between closing your next deal and failing to make it happen. If you’re serious about succeeding as a real estate investor, that alone ought to be enough to motivate you to get your credit score into shape.