Credit 101

It is true that there are many kinds of real estate investing that do not require credit, but from time to time, you just need to borrow from a bank. As everyone knows, for the last couple decades, banks have been relying more and more on your credit score. So here is a little bit about credit.





First of all there are three credit bureaus: Equifax, Experian, Trans Union. Each of these agencies is a reporting agency that simply reports information given to it by creditors. This means they know nothing about anything on your report. If someone tells them you owe money, they simply report it. They do not question items unless you specifically ask them to investigate it.





FICO Scores- The three credit bureaus use a scoring system referred to as FICO. They feed all the information they know about you into a computer that does some amazingly complex calculations and produces a number. (Like BCS for you college football fans) This number is meant to represent your credit worthiness. Does it? Many people will argue this is flawed, but the fact is banks have all these statistics about default rates and scores, so score is what counts.





Good Scores – Scores can range from the mid 300’s to the mid 800’s. In the eyes of the bank, conventional lending is 620. Another significant score is 580. This score is important for newbies buying their first home (owner occupied 1-4 unit). 580 is qualifying score for FHA a government insured program that can be combined with things like ameridream and seller concessions to get you in a home with no money. Scores of 640, 660, 680, 700, and 720 are all important levels. There are far too many programs to describe, but at each level you are open to new possibilities especially for investment properties.





Checking Scores – Many people recommend that you check your score once a year, however I feel that is not enough. For example, last fall, my experian credit score fell 62 points in just 34 days. There were several items incorrectly reported and I would have been in for a shock if I had walked into a bank. Luckily, I made moves to correct it and 2 months later it was back where it was. So my advice is checking it often. However, do not just walk into a bank and ask for a copy of your credit report. There are 3 types of inquires: Inquiries to borrow money, Promotional Inquiries, and Inquiries for you. Promotional inquiries are for things when you get credit card junk mail – they prescreened you with a promotional credit report. An inquiry for the purpose of borrowing money will lower your credit score. This is because they feel you are taking on new debt and they are not sure you are going to handle it. So be sure to get an inquiry just for you. You can get scores just for your use buy going to the credit bureaus websites.





www.transunion.com


www.equifax.com


www.creditexpert.com (experian)





For about $80 a year, Equifax and Experian have credit monitors you can sign up for. These allow you to check your credit as often as once a day. This is very important in being able to see problems quickly and also to chart your progress in your efforts to improve your score. With Trans Union, you have to buy the report individually for about $10. I do this far less often because of the cost.








So now you have your score – now what? The first thing to do with good or bad credit is to look for past due bills, collections, judgments, etc. Almost any loan you get is going to want to see that you are not behind on anything!!!





Things you can do to improve your score….





PAY YOUR BILLS ON TIME!!! This sounds basic, but I see it all the time. Just this week a client of mine could not understand why the bank would not give him a loan for a house, and he defaulted on a $200 credit card last month!!! So just pay your bills.





DON’T APPLY FOR CREDIT. As I mentioned above, Inquiries show you are taking on debt and they are not sure how you will handle it so your score will fall. Credit Inquiries remain on your credit for 2 years.





CHECK FOR MISTAKES. Many people have mistakes on their credit report. It could be something you paid off and is still showing. It could be showing late and be a computer error. Could be anything. One I see a lot is with Fathers and JR. – These can get really ugly. If you subscribed to the membership with Equifax and Experian, you can simply go into your account and file a dispute right there. The agencies then have 30 days to verify or delete the item.





DISPUTE CORRECT ITEMS. What?? Dispute correct items? Yes. After you dispute the incorrect items, start with the correct ones. This does not always help, but sometimes it does. These are large companies and some of them keep bad records, or do not respond in the required 30 days. Just this week I had a 30 day late on a mortgage removed (I know pay your bills on time) I protested it, and then it was gone. IMPORTANT: when you dispute these items, do it after the incorrect items and do it a couple at a time. If the credit bureau feels your disputes are frivolous, they can throw them all out and not investigate any.





SETTLE ITEMS. Any item you still have on your report that shows a past due balance needs to now be brought current. If you have large collection items, settle them for less. Many times the company will accept 50% or less of what you owe.





TALK TO THE COMPANIES. Last thing you can do is talk to the companies. Collections remain on your credit for 7 years and judgments and bankruptcies remain for 10 years. If you can get these items removed, it certainly helps. Many times you can find a nice person at the office that can help you. It never hurts to ask. Back when I was in college, I had a judgment against me from the gas company. So last summer, I started emailing every address I could find on their web site. I said I was young and stupid and I learned my lesson. I then found a lady to help and a week later the judgment was off of my credit.


CREDIT BALANCES. Another funny thing your score looks at is how much of your available credit you are using. It figures if you have a $5000 credit card and you owe $5000 that money must be tight and you need everything you can get. But if you only owe $2000, you show restraint and don’t need to grab up that available money. So on credit cards, try to stay at less than half of the available balance.





CONSUMER CREDIT COUNSELING – This is a tough one. If you have a lot of bills, these can be good. However, words of caution, lenders view this as a bankruptcy. The problem is that many times you get a payment plan for like 5 years. Four years into the plan, the bank still feels you are in bankruptcy. If you filed for bankruptcy in the first place the bank sees you as four years out of bankruptcy. I am not a bankruptcy lawyer, but I often find people who have been trying to do the right thing and pay their bills, and the bank will simply not give them money. This is a very tough situation. If at all possible, talk to your creditors yourself, and try to get caught up and avoid bankruptcy as well as credit counseling at all costs.





PAY YOUR BILLS ON TIME!!! This one was so important I though I would mention it again for those who may have missed it. According to Equifax, the average consumer was last late 19 months ago. If you want a tough to get loan, you definitely need to shoot for better then average credit.





These items should give you a good start on improving your score. I have had several clients that could not qualify for any loan, then 3 months later they received a conforming 7%. There is no secret; there are no expensive programs to fix it. Hard work is the answer.