When it comes to getting a loan in real estate, you are going to want an awesome credit score. But unfortunately, this can be a pain to monitor. Understanding how your credit score is calculated and what you need to be aiming for can be vital to getting great interest rates!
For many people, keeping a close eye on their credit score and actively maintaining a healthy score can be a daunting task. This is especially true for anyone along the spectrum of new life choices or unexpected changes. Whether it’s purchasing a vehicle or home, or perhaps a sudden barrage of medical bills, one can be faced with the reality of the power held by those three numbers.
Your credit score is composed of five determining factors: Payment History, Outstanding Credit Balances, Length of Credit History, Type of Credit and Credit Inquiries.
- Payment History. Payment history is of very high importance as it accounts for 35% of your overall score.
- Outstanding Credit Balance. Followed closely is your outstanding credit balance, which holds 30% of your score. It is important to maintain a good payment history and to monitor your Outstanding Credit Balances closely. These have the greatest impact on your score and can affect it quickly. If you see a mistake in either of these areas, it is imperative to resolve it quickly for the sake of your score.
- Length of Credit History. Over time, credit can improve with the Length of Credit History element, which accounts for 15%.
- Type of Credit. This comprises 10% of your score.
- Credit Inquiries. The final 10% of your credit score is made up by credit inquiries.
Unfortunately, about 79% of all credit reports contain mistakes of some kind. Furthermore, 25% of credit reports contain errors that result in credit denial. You should also frequently inspect your report for personal information, making sure what is listed is current and accurate.
Another important aspect to note on your report is the accuracy of your closed and open accounts. As many as 30% of reports incorrectly list closed accounts as open–which can negatively impact your score! To view your credit report and score, pay for a copy from each of the following agencies: Experian, TransUnion and Equifax. Most of the free reports don’t include your credit score. And remember, lenders will use your middle score from each of the reporting agencies.
Monitor your credit closely and file any disputes promptly. If you work on improving the health of your credit score, you will benefit by receiving lower interest rates for future projects.
Defining the Score
Let’s break down those numbers to get a better understanding of where you are and what it means for you.
- 850= Highest. If you are here, you are golden. You can expect the lowest of interest rates; any institution would be pleased to grant you a loan or anything else you might be requesting.
- 720= Outstanding. This is an excellent score and you can negotiate some good interest rates. Most institutions will grant approval with this score.
- 680= Good. This is a decent score. You are looking at a little bit higher interest rates with the possibility of some hesitancy or possibly denial of larger loan amounts.
- 620= Danger. This will cause concern for many institutions and higher interest rates.
- 500= Needs Work. It will be difficult to get approval for loans and other financial endeavors. There are most likely red flags on your credit report that need your attention & action to resolve.
Got questions about your credit score? Let me know down below by leaving a comment and I will do my best to respond!
Join me every Thursday to dig in to real estate secrets!
My wife doesnt have any credit as of now and we have been wanting to build it for her but everytime we apply forna credit card for her she gets denied.
What can we do to help get her start building credit?
Estevan, thanks for your question!
One way is to buy a $300 piece of furniture and put it on credit. Just make sure the company can report it to one of the Big 3 companies (that I list in the blog). You have to show a history of credit to get a credit card, so that can be a simple way to start.
Another way is to go to a local bank and have her dad cosign on the credit card for a year. Then just keep up on the payments. They’ll probably give you a $500 card. You should never run more than 50% of the available credit!
Hopefully this helps. Always feel free to ask me more questions!
The way you try to get the status of the prospective loan receiver is helpful. What if the borrower did not have history in loan and repayment? What other way will you see if he qualifies or no?
Thanks for your question Dereje! Typically it’s better to do those kind of loans in the group loans because you have social collateral. If it’s not a group loan, then they would need to provide some other form of security for loan payment. Normally that would be some kind of collateral, like a piece of land or a piece of equipment.
I hope this helps!
I know you are aware of the creditkarma.com but their phone app is great. You can monitor your credit score at all times in all of your accounts.
I know of creditkarma.com but I’ve not used their app! Do you know if they specifically give you the three scores from the leading companies?
Hi Billy. I use creditkarma.com. it provides credit scores and reports along with tools to aid in correcting errors, charting, and even email alerts when new inquiries are initiated. It is free and easy. Don’t mean to sound like an infomercial but it is a good site
Thanks for the infomercial Freda! It’s always great to share tips! Do you know if it gives you the three scores from the leading companies?
Hi Billy, CreditKarma.com only gives two leading companies – Transunion and Experian.