Intro: A Better Credit Score = More Rental Property Cash Flow
If you want more rental property cash flow there are a variety of strategies available to you. Many of these start by doing your due diligence when choosing a property to purchase. But there is one lesser used strategy that many investors overlook — having an excellent credit score.
Improving your credit can help you get better loan rates and purchase more investment property — and this isn’t only true for first time investors. In fact, my husband Rich and I have used a professional credit consultant for over 15 years to improve our credit. In doing so, we’ve been able to get more loan approvals, buy even more investment properties and we reduced the interest rate on the recent refinancing of our primary home by 40%.
Intrigued? I recently had Don Oberle, a leading expert on credit from www.CreditIQ.org, on my Real Wealth Show Podcast and also on a recent RealWealth Webinar. He provided a ton of great insight about how improving your credit can bring you more success as an investor. I’m going to share his insight in this article. After reading you will know more than what 95% of the population knows about credit, and how to effectively leverage your credit score to build wealth for a lifetime…
What is a Good Credit Score?
As mentioned in the introduction, if you want more rental property cash flow you need to have good credit. But what is “good” credit? According to Don, a good credit score for most investors is one that falls into the 740 or above category. Once you’ve surpassed that score you can save $300-$600 per month in interest if you make less than or equal to $100,000 per year. If you make more than $100,000 per year, you can expect $600-$1,000 per month in interest savings. In addition to monthly interest savings, having a good credit score will also come with faster approval times and less money down.
How to read the credit report and find the real lender score?
If you want to increase your credit score to get more rental property cash flow it’s important to understand how to read a credit report AND how to find the real lender score. Did you know that Credit Karma and scores you obtain from your credit card company are fake simulated scores? They’re not real. They’re generally 20 to 60 points higher than what the real lender scores are.
Even if you log on as a consumer to the credit bureau sites themselves, if you read the fine print, it says, “These are imulated scores.” You would assume if you’re getting a score directly from Experian, TransUnion, and Equifax, you get the real score, but in most cases, you’re not.
The easiest way to tell whether you’re seeing a real lender score comes down to the cost of the report. If you’re not paying at least $30 to $50 for that report, the scores are not real. I say again, if it’s free, it’s never real.
How to achieve and maintain a score above 770?
As you probably know, an 850 credit score is as high as you can go, but many people don’t realize that once you break the 770 mark, there’s really not much of a difference. This is important to understand if you’re an investor looking to increase your monthly rental property cash flow.
If you have loan amounts between $729,000 and $1,000,000+ it’s essential that both you and your partner have at least a 770 score. If your loans are below this amount then a 740 or above is perfect.
Now, if you’re buying investment properties, which you likely are considering you’re reading this article, you really need to be above 740. If your score is below this mark you’ll have to put more money down and your rate is going to be a little higher.
The danger mark for high net worth and large loan amounts in the jumbo or super jumbo ($700,000+) is to have a credit score below 770. This is a big red flag for lenders.
Now, if you want to demand a 0% on a car loan, you need 740 minimum. If you want to demand 9.9% fixed rates on credit cards, 740 minimum is again necessary. If you want cheaper car insurance and home insurance premiums, once again 740 is the number to beat.
Moral of the story: if you’re below 740, you definitely need to find a way to improve your score?
How do you do this?
Make On-Time Payments
Payment history makes up about 35% of your credit score. While we all know a late payment can drop a score, most people have no clue as to what degree. Any new late payments collections paid or unpaid, or bad debt charge-offs of any type, will drop the score as much as 107 points. Even one new 30-day late payment of $5, can cost you the loan you want and the credit score you deserve.
In fact, here’s the key point: the lower the minimum payment that you’re late on, the further the score will drop. This happens because it assumes that if you can’t make a smaller payment, you’re in serious jeopardy and the score will then dramatically drop.
Again, the smaller the payment is, the further it drops. This is the opposite of what most people think. It’s really counter-intuitive.
Never Charge More Than 30% of Your Credit Limit
The “30% Rule” is an incredibly important aspect of your credit score. It applies to revolving trade lines, store cards, credit cards, and anything else that’s revolving. What you want to do is look at each credit card limit and subtract 70% from the credit limit amount. This will equal 30% of available credit. If you have to use the card, just don’t ever exceed that 30% mark.
For example, let’s say you have a thousand dollar limit… you should never charge over $300 or 30%.
A zero balance on the lender’s credit report, not your credit card report, gains you the most points. Every dollar that shows up in the balance column takes away points. Once you hit that 30% margin, it starts dramatically dropping even further.
Creditors report the data to bureaus every 30 to 90 days, which is the key point. It happens randomly, throughout the month, whether it’s the 1st, the 15th, or the 30th, where most people carry a balance. They do not report what you paid that month on the statement but rather what your current balance was at that snapshot in time when they uploaded the data.
That’s how it really works. They’re not reporting what you paid it down to, they’re reporting what it looked like the day they upload and we don’t know what day they’re going to do it, do we? The key point, though, is that if you pay off your credit card today, it could take up to 90 days for it to eventually show on the lender’s report. It’s never going to be instant.
Lengthen Your Credit History
The length of your credit history is 15% of your score. The longer your credit cards are active and open, the better your score will be.
How many credit cards do we need that are active, open and current that are greater than 12 months old in order to achieve a high 700 to 800 score? Three.
If you don’t have at least three cards that are active, open, and current, that are over 12 months old, it’s very, very hard to get up in the high sevens and eight hundreds.
For you, folks, that only have maybe one or two, as long as you’re not doing any major financing in the next six to 12 months, then sometimes, it’s wise to go grab that third card, age it out 12 months, and then, let that score jump on the 13th-month margin.
Keep Cards Open & Avoid Zero Balances for Longer Than 5 Months
If you close a credit card, you will lose all the good history you built on those cards. Instead, here’s how I want you to manage your three or more cards: only make a $5 purchase once every five months to keep them active. That’s it.
A zero balance on a credit card goes inactive after six months of non-usage which will then drop your score. The definition of an inactive card is any open card with a zero balance that hasn’t been used in six months is considered inactive and will then lower the score, charging a small amount on the card every five months, such as $5 or less, like a cup of coffee, then pay it off when you receive the statement. It’s important to wait until you get the statement because for cards like Macy’s, Capital One, and a few others, if you pay it off before you get the statement, it’ll look like you haven’t been using it.
So, the day you get the statement, pay it to zero. This will help your score increase within 90 days, stimulating activity, and ensure the creditor doesn’t close them from non-activity. Take a guess how much it could drop your score if they close one credit card? A hundred points, up to a hundred points gone overnight. The older your credit cards are, the more valuable they are. Those are the most dangerous to close.
Be Aware of Trended Credit
There’s a new system out in the last two years called “Trended Credit,” that no one is really talking about yet — it’s an insider thing, where they’re now looking at the last two years of history.
In the past we would teach people that 3 months before they do a major purchase (ie: a home or car loan), they should pay all of their cards down to 0% and then lock them away in a safe for 90 days. Using this strategy used to give people a credit boost within 3 months, but not anymore. Now they’re looking back at every month over the last two years. They’re getting trickier, which is a big thing to keep in mind.
Note That New Credit Drops Your Score for 1 Year
New credit is 10% of your credit score. New open accounts drop your score for a year. Now, the reason why FICO dropped your score for a year when you open up a new car loan, home loan, credit card, whatever is because it’s saying, “Until you can prove you can handle this new debt, we’ll take the points away, and as long as you weren’t late on the 13th month, you get your points back.”
As such, you always want to plan one year ahead of the curve with everything you do with your big purchases, especially real estate, real estate auto loans for example. One year prior to that, you probably shouldn’t be opening up any new accounts unless you’re short a few credit cards to help build it up. New inquiries can drop it two to three points.
In most cases, opening any type will drop your score. Two or more inquiries within 90 days will also drop your score, byan average of 5-20 points. One inquiry within 90 days can drop it two to three points. It’s very small. Now, the good news is that your points are returned within 90 days of each inquiry. You get your points back after 90 days.
There’s companies out there saying, “Hey, pay us 500 bucks and we’ll take your inquiries off.” Don’t do that. You’re going to get your points back in 90 days anyway, and that’s about how long it’ll take the company you paid to do AND there’s a good chance they’ll upset the credit bureaus or red flag your account in the process. Don’t pay the company, just wait the 90 days.
Also, be careful about your inquiries. The more inquiries you receive over a 90-day period, the higher the score loss. Again, consult with a professional before you start making those moves.
Don’t Pay off Your Loans Too Quickly
If you’re looking to increase your rental property cash flow by improving your credit score, the final thing you need to remember is to NOT to pay off your loans too quickly. It seems counter-intuitive, but it’s true. You probably didn’t realize that when you pay off a car loan that is less than two years old, it’ll drop your score 30 to 60 points? It’s a big deal. The reason why is the same reason why your score drops when you pay off bad debt, like a collection. It’s because FICO has no way of calculating whether you have a million dollars in the bank or a single dollar in a bank. What it does know by patterns is when people pay off debt quickly, they are typically depleting their savings and reserves to do so. As such, if you were to get sick and couldn’t work for a couple of months you’d have no money to fall back on. This would cause you to start being late on all of your other payments…
If you want more rental property cash flow coming in every month please do not underestimate the power of having a credit score of 740 or above. If you’re beneath that number, you can always seek out a professional to help. I’ve done it and you can too.