Credit History
Credit history is a record of an individual's past borrowing and repayment behavior, crucial for lenders to assess creditworthiness for loans and mortgages.
Key Takeaways
- Credit history is a record of how you manage debt, including payment behavior and amounts owed.
- Lenders use your credit history to assess your creditworthiness, determining loan eligibility and interest rates.
- A strong credit history can save real estate investors thousands of dollars on mortgage interest over time.
- Key factors include payment history, credit utilization, length of credit history, new credit, and credit mix.
- Build good credit by paying bills on time, keeping credit utilization low, and regularly checking your credit report for errors.
What is Credit History?
Credit history is a detailed record of how an individual has managed borrowed money over time. It includes information about your past and present debts, such as credit cards, car loans, student loans, and mortgages, along with your payment behavior. Lenders use this information to assess your creditworthiness, which is your ability and willingness to repay new debts. A strong credit history signals to lenders that you are a reliable borrower, making it easier to secure financing for real estate investments.
Key Components of Your Credit History
Your credit history is compiled into a credit report by major credit bureaus (Experian, Equifax, TransUnion). This report contains several key pieces of information that contribute to your overall credit profile:
- Payment History: This is the most important factor, showing whether you pay your bills on time. Late payments can significantly harm your credit.
- Amounts Owed: This looks at how much debt you currently have and your credit utilization (how much credit you're using compared to your total available credit). Keeping utilization low is generally better.
- Length of Credit History: The longer your credit accounts have been open and in good standing, the better. This shows a long track record of responsible borrowing.
- New Credit: This includes recent applications for credit and newly opened accounts. Too many new accounts in a short period can be seen as risky.
- Credit Mix: Having a variety of credit types (e.g., credit cards, installment loans like a car loan or mortgage) can be beneficial, showing you can manage different kinds of debt.
Why Credit History Matters for Real Estate Investors
For real estate investors, a strong credit history is paramount. It directly impacts your ability to get approved for mortgages, secure favorable interest rates, and access other types of financing like lines of credit or hard money loans. A good credit history can save you tens of thousands of dollars over the life of a loan.
Real-World Example:
Imagine you want to buy an investment property for $300,000 and need a $240,000 mortgage. If you have excellent credit (e.g., a credit score above 760), a lender might offer you an interest rate of 7.0%. Your monthly principal and interest payment would be approximately $1,597. Over 30 years, you'd pay about $334,920 in interest.
However, if your credit history is fair (e.g., a credit score around 640), the same lender might offer you a higher interest rate, perhaps 8.5%. In this scenario, your monthly principal and interest payment would jump to about $1,845. Over 30 years, you'd pay roughly $424,200 in interest. That's a difference of nearly $90,000 in interest payments just because of your credit history!
How to Build and Maintain Good Credit
Building and maintaining a strong credit history is a continuous process. Here are key steps:
- Pay Bills On Time: Always make at least the minimum payment by the due date for all your credit accounts. Setting up automatic payments can help prevent missed deadlines.
- Keep Credit Utilization Low: Try to use no more than 30% of your available credit on credit cards. For example, if you have a $10,000 credit limit, aim to keep your balance below $3,000.
- Avoid Opening Too Many New Accounts: While a diverse credit mix is good, opening many new accounts in a short period can negatively impact your score.
- Regularly Check Your Credit Report: Obtain a free copy of your credit report annually from each of the three major credit bureaus at AnnualCreditReport.com. Review it for errors and dispute any inaccuracies.
- Maintain Older Accounts: Don't close old credit accounts, especially those with a good payment history, as this can shorten your credit history length and increase your utilization.
Frequently Asked Questions
What is a good credit score for a real estate loan?
While there isn't a single good credit score for all real estate loans, most conventional lenders prefer scores of 620 or higher for FHA loans, and 680-740+ for conventional mortgages. For the best interest rates and loan terms, aiming for a score above 740 is ideal. Some specialized loans, like hard money loans, may have lower credit score requirements but often come with higher interest rates and fees.
How often should I check my credit history?
You are entitled to a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once every 12 months through AnnualCreditReport.com. It's wise to check your report at least once a year to review for accuracy, identify any potential errors, and monitor for signs of identity theft. Many financial institutions also offer free credit score monitoring services.
Can I invest in real estate with bad credit?
Yes, it is possible, but it can be more challenging and expensive. Options might include seeking out private lenders, hard money loans, or seller financing, which often have less stringent credit requirements but typically come with higher interest rates, fees, and shorter repayment terms. You might also consider partnering with someone who has good credit or focusing on strategies like wholesaling that don't require traditional financing. However, improving your credit history should be a priority for long-term success.
Does checking my credit history hurt my score?
No, checking your own credit history, often called a soft inquiry, does not hurt your credit score. Lenders perform hard inquiries when you apply for new credit, which can cause a small, temporary dip in your score. Regularly checking your own credit report is encouraged as a way to stay informed and protect yourself from errors or fraud.