Maintaining a high credit score will mean more for some people than others. If you lead a financially simple life- have one home, perhaps a child or two, earn money- but aren’t in debt or particularly rich, your credit score probably should not be the first thing on your mind. However, if you like to live rich, invest in real estate, perhaps leverage yourself in your transactions, your credit score will make a big difference. It’s sort of like a comprehensive resume which some other agencies make for you. Your score varies from 450-850 based on a variety of factors and changes on a regular basis.
The most important factor is payment history. This includes payments on your credit cards, rent payments, mortgage payments, and any other lines of credit you have outstanding. Also on this section of the report are the number of delinquent accounts you have, how long they have been delinquent for, and the amount of money in question. Collections reports from certain companies may appear as well. Not all companies report to crediting agencies- it’s an important question to ask when deciding whether or not to argue with a specific creditor over a debt.
Another factor which affects your credit score is the amount of money owed. The credit bureaus track the balances owed on specific accounts, the number of accounts open with active balances, and the proportion of open credit to credit used (i.e. having $1,000 balance on a $10,000 limit is better than having a $9,000 credit balance on a $10,000 credit limit). Note that owing a lot of money is not a bad thing- it can actually look good if you consistently make large payments. People researching your credit history are generally more concerned with the amount and consistency of your income than the amount and consistency of your debts.
Another important factor is the length of time you’ve maintained credit lines. This ties in to the payment history but deals more with then long-term consistency. If you’ve made 100 payments on time out of 100 payments due on both your mortgage and your credit card, you’re going to get brownie points from the bank. They know you’re concerned with clean credit and will be more willing to lend you money.
The final items on your credit report are the types of credit lines used. Certain debt is actually better than others and different institutions may look differently upon your quality of debt when making a loan. For example, if you’re taking out a loan for real estate and you’ve got three lines of credit open for three separate mortgages that will be viewed with more significance than your credit card balance. That’s not to say that the credit card balance can affect you, either positively, or adversely, depending on your history with them.
There are three agencies which report credit scores. While they are all quite similar, and you can call any of them to obtain your score, Equifax is the first one that comes to my mind. The other agencies are Trans Union and Experian. Your score is sometimes referred to as a “FICO” score, which refers to the Fair Isaac Company- the original credit score team.
Now you may be wondering how this pans out in real life. When will your credit score first matter to you and what can you do about it? The answer for me was renting my first apartment. This was the first time an organization wanted to analyze my credit. The apartment was $2,400 per month and I had to prove that I earned 40x the annual rent, or $88,000. At the time I was 21 year old and was unable to meet that income requirement on my own. The management agent informed me that I had a few options. I could show 100x the monthly rent in savings (or prove I was worth at least $240,000 in the bank) or I could have somebody who does fill one of these income requirement co-sign the lease. I chose option two and asked my mother to sign on to the lease. This is actually a great move, because the apartment was rented in my name, with her as the co-signer. This means that (technically) I have no liability for the apartment other than her permanent distrust for me if I decided to run away or not pay the rent. However, if I pay the rent on time, wherever the money comes from, it appears positively on my report. My credit history has been positively influenced by my apartment b/c future creditors can see that I was able to make on-time payments of $2,400/month for 12 months. Interestingly, she was doing me a favor by co-signing. The only affect on her credit report is slightly negative- an additional line of open credit. In reality it doesn’t matter since she isn’t looking to open up any more new lines of credit, but it could if she tried to rent a $2,400 apartment also, and was on the line for $4,800/month in rents.
On a grander scale, asking a bank to lend you $30 million for a real estate investment will depend on your credit too. Generally, a more in depth discussion and relationship have to exist before a bank makes loans of this size. They want to know your experience in real estate investing, the people and processes involved with the deal, and how they are getting paid back. If you’ve developed real estate before, and never missed a payment on that fat mortgage check, they bank will think highly of you. However, good luck getting that big loan with only one sour deal under your belt- the bank will show you the door.
These sorts of rules apply with all things which are not paid for up front in cash; houses, cars, boats, education etc. If you’re looking to establish a solid reputation for credit at a young age, here’s the best advice I can give: have a steady, increasing (if possible) income stream, start making transactions- even if just on a credit card and show that you are an active but trustworthy borrower, pay more than the minimum you owe when possible on credit card and other accounts, and don’t be late on your payments!
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Russell Bailyn
Wealth Manager
Premier Wealth Advisors, LLC
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@pfawealth.com
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