Best Ways to Boost Your Credit Score

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November 10, 2023

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As a residential real estate investor, your credit score is more than just a number; it’s a gateway to better financing options, more attractive loan terms, and a swifter path to scaling your investment portfolio. Understanding how to improve this critical aspect of your financial profile can be transformative. 

Lenders typically set minimum credit score thresholds for loan eligibility, so it’s crucial to maintain a score that meets these requirements. For Backflip, if you have a FICO score over 680, you’re eligible for best terms, and if your FICO score is below 640, you can only get a loan if you have a guarantor.

Your FICO Score

Your FICO score is made up of several factors:

≈35% of your score is based on on-time payments (always pay on time)

≈30% is how much available credit you are using (use between 1-30% of available)

≈15% is based on the length of time you’ve had accounts open and in good standing

≈10% is based on the types of credit you have (more types is better; it shows range)

≈10% is how many credit applications, aka ‘Hard Pulls’, have been run recently (the fewer the better)

How to Improve Your Credit

Here are strategies that you, as a real estate investor, can use to enhance your credit score.

1. Monitor Your Credit Report

To improve your credit, you need to keep a close eye on your credit reports. Free services from platforms like AnnualCreditReport.com allow you to review your credit history from major bureaus. Look for errors or discrepancies that could unfairly drag down your score. A foreclosure in your past that should have been removed but wasn’t might be destroying you. Dispute inaccuracies immediately in writing to the bureaus.

2. Credit Piggybacking

The absolute fastest way to high credit score is reserved for people who haven’t got a sufficiently long credit history. If someone with good credit adds you as an authorized user to their credit card, you get the benefit of their history. They don’t even have to give you their card. You’re not obliged to actually spend any of their money.

3. Manage Your Debt-to-Income Ratios

Lenders don’t just look at your credit score; they assess your debt-to-income (DTI) ratio too. A lower DTI is appealing, as it indicates a strong balance between your earnings and obligations. Work towards paying down existing debts, particularly high-interest ones, and be cautious about taking on new debts.

4. Optimize Credit Use 

To optimize your credit use, you want to make sure you’re following the “golden ratio”. This refers to about how much of your available credit you’re using at any given time. To maintain a good credit score, try to use less than 30% of your total credit limit.

For example, if your credit limit is $10,000, the “golden ratio” suggests that you should try not to use more than $3,000 of it. If your balance goes over this amount, it can start to negatively impact your credit score. This rule applies to each of your credit cards and also to your total credit limit across all cards.

If you’re consistently going over the 30%, consider requesting a credit limit increase, but keep your spending the same to improve your ratio.

5. On-Time Payments are Non-Negotiable

Late payments can severely hurt your credit score. Set up reminders or automate your bill payments to ensure you never miss a deadline. Remember, payment history accounts for 35% of your credit score.

6. Manage Hard Inquiries

When venturing into new real estate investments, applying for loans is often inevitable. However, each loan application can lead to a hard credit inquiry, which might slightly lower your credit score temporarily. This is where choosing the right financial partner becomes crucial. At Backflip, we understand the importance of preserving your credit score, especially during the pivotal stages of scaling your real estate investments. That’s why we offer a unique advantage: when you submit a non-binding loan application with us, we do not perform a hard credit pull. This approach ensures that your credit score remains unaffected while you explore your loan options.

7. Continuous Education and Professional Advice

Stay informed about credit and financial strategies specific to real estate investing. Consulting with financial advisors or attending workshops can provide tailored advice and new perspectives on managing and leveraging credit effectively in the real estate domain. Backflip frequently hosts webinars with financial and legal advisors who can help answer questions you may have about your business.

Improving your credit is rarely an overnight process, but it’s a critical step in scaling your real estate investment business. By employing these strategies, you can enhance your ability to secure favorable loans, negotiate better terms, and expand your investment portfolio. 

 

*Disclaimer: The information presented is intended for educational purposes only. The content is not legal, financial or investment advice, and may not apply to your specific legal, financial or investments needs. To obtain advice tailored to your circumstances, consult a licensed professional advisor.

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