As a real estate investor, you’ll need access to different types of financing throughout your career. After all, most investors don’t have enough money to buy real estate outright (and it’s usually not a great idea to do so even if you did).
This means you’ll need access to loans. To qualify for large enough loans to cover a real estate investment, you will usually need good credit. Lenders use credit scores to determine how much of a risk the borrower presents.
If your credit isn’t the best, then you’ll want to work on improving it. The higher you can get your credit score, the more likely you are to be approved for larger loans and receive loan terms that are beneficial to you.
However, you need to know that there are many mistakes you can make when trying to correct your bad credit rating. Some poor judgments on your part can hurt your chances of repairing your credit score.
While there are several ways to go about it, the following are nine common mistakes that you need to avoid when trying to repair bad credit.
1. Not Monitoring Your Credit Score
When you check your credit report from time to time, you will become aware of trends. For instance, if you notice a lot of activity in your credit report, it might indicate that someone has been accessing your file without permission.
You could be the victim of identity theft or just erroneous reporting by some organization. Whatever the case may be, monitoring your report allows you to identify problems early and take action before they have any severe consequences for you.
Making efforts at cleaning up bad credit requires hard work and diligence. Keeping track of your credit score and report makes it easier for you to target where the problems are, and ultimately helps prevent your score from dropping.
Regularly Review Credit Reports and Scores
You can ask for your credit report from any of the three credit bureaus, including Experian, Equifax, and TransUnion. You’re allowed a free credit report from any of these credit bureaus twice a year. By keeping track of any changes in activity reported by these agencies over time, you’ll be able to identify trends and thus anticipate problems before they become too serious for you to fix.
Dispute Errors on Your Credit Report
One of the primary reasons you should check your credit report regularly is to look for potential discrepancies. These discrepancies might include:
- Errors you made – If you mistakenly report the wrong information, such as listing your income incorrectly, and it gets posted to your file, it can negatively impact your score. You’ll want to report such errors so you can correct them as soon as possible.
- Errors made by creditors – If a creditor made a mistake on your file, it could severely hurt your credit score. Be sure to reach out to the creditor and ask them to correct the error. If they do not help you, you can contact the three credit bureaus directly to ask for help rectifying the situation.
Normally, you can dispute errors online, making it quick and easy. The credit agency will then ask the creditor for proof of the error and remove any undocumented disputed items. If the creditor does provide documentation, you will need to provide proof of the error. These agencies are bound by law to repair all verified errors in your file.
- Fraud – If an account listed on your file was opened without your consent or knowledge, you might have been the victim of fraud. Work with the authorities and credit bureaus to get it removed from your record.
Use Credit Monitoring Services
It’s unrealistic to comb over your credit report more than once or twice a year. Unfortunately, this means it may take a while before you spot errors, which can be a problem if you’re the victim of fraud. Since errors could damage your credit score and affect a loan application, you may want to consider using a credit monitoring service.
Credit monitoring services will alert you when any changes are being made to your file. Such alerts include:
- A change in the status of an account.
- New inquiries on your report.
- Even changes in the address where your records are housed.
By subscribing to one of these services, you can easily track all reported activity while allowing yourself enough time to resolve any discrepancies that may exist.
2. Forgetting To Make Payments
There are a ton of excuses out there for not making payments on time. For example, you can lose track of timing due to a personal emergency (such as a hospital stay) or a significant life event (such as moving to another home). As diligent as you might usually be, such situations happen more often than people think.
Ensure Bills Are Paid On Time And In Full
Because late and missed payments can hurt your credit, consider setting up automatic payment withdrawals directly from your account for any debts you have. Automatic payments take the worry out of paying your bills on time. Additionally, make sure the bill is paid off entirely every single time, if you are able to do that.
Prioritize Paying Off Past-Due Accounts
You may not be able to pay off everything all at once-but you can prioritize your payments based on just how much of an impact your debts will have on both you and your credit score.
Start by looking over your previous statements and identifying the debts that have been outstanding the longest. Begin sending payments to those creditors first. Pay off as much as you can each month until those debts are either paid off or reflect a payment history of only one or two months in arrears.
3. Closing Accounts After Paying Them Off
Closing an account after you’ve paid it off may seem like the wise thing to do. After all, if you don’t plan on using it, why bother keeping it open? Besides, you may not want to risk being tempted to use the account again, resulting in debt building back up after working so hard to pay it off. However, a closed account can cause more harm than good in the long run.
Here are two primary reasons for keeping your credit cards open even if you’ve paid them off:
Build Your Credit File
First and foremost, be aware that when you close an account, your credit score takes a slight hit. This is because length of established credit plays a role in calculating your credit score. The longer your accounts are open, the better your score will be.
Having more open accounts helps your score by making the average age of your accounts longer, so there is no reason not to keep them open unless it is costing you money, like monthly or annual fees.
Secondly, when you close a card, it will show up on your report as a “closed account,” which can also damage your score. Additionally, creditors will wonder why you closed an account and will be less likely to extend credit to you again if there isn’t a reason or explanation for doing so.
Finally, closing a credit account will ultimately reduce your credit utilization ratio. When you close an account, it takes away your available credit, inflating your credit utilization even if your debt has grown smaller.
Keep Credit Cards Available
Keeping a credit card account open will give you access to a line of credit when you need it. If you close it, the issuer will take your card away. Suppose you suddenly find yourself in need of funds.
In that case, whether it’s for a personal emergency or a real estate opportunity available on short notice, you’ll regret no longer having that account. Keep your credit cards open in the event of a financial emergency or opportunity.
4. Opening Too Many Accounts At Once
Adding an account can help improve your credit utilization ratio. Additional accounts can also come in handy if you think you’re going to need quick access to funds at some point. However, be careful about opening up too many accounts at once.
Too many new accounts will lower the average age of your accounts, which will hurt your credit score. Lenders evaluating your credit report will see all of these new accounts and raise questions about your risk profile.
Limit Applications For New Accounts
The best tactic is to space out how often you’re applying for new accounts. Generally speaking, don’t apply for more than one account at a time, and wait at least 90 days between applications, if possible. Ideally, six months between applications for new accounts is optimal.
5. Not Keeping Track Of Your Credit Usage
If your credit cards are close to maxing out, lenders will think twice about approving any loans. They will determine that you may not be capable of making timely payments on a new loan when you already have a sizable amount of debt you need to pay off.
The best practice is to keep track of your credit card usage. Even if you’re making small purchases, these can add up quickly if you don’t keep track of how much you’re spending. Before you know it, you’ll be carrying too much debt, which will not only damage your credit score but make it challenging to secure new accounts as well.
Maintain Low Revolving Account Balances
No matter how well you manage every other area of your finances, if you regularly max out all of your cards on high limits, it will impact your score negatively. We recommend keeping this figure as low as possible. Keep your balance low by limiting spending on all revolving accounts.
Pay off what you owe every month if it’s possible. At the very least, make the recommended payments on time and in full when they’re due.
Keep A Credit Utilization Rate of Less than 30%
Scores are based on the amount of risk you present to creditors. A large part of that is shown with your credit utilization ratio; this is calculated as your total balances divided by your total available credit.
For example, if you have $2,000 in debt using a card with limits of $10,000, it means you have a credit utilization ratio of 20 percent since that’s how much of your available credit you’re currently using. It’s best if you keep your credit utilization rate at 30 percent or below.
Request a Credit Line Increase
One easy way to improve your credit utilization is to request a credit line increase from your current card issuer. Not only will you have more financial flexibility with more credit to use, but it will lower your credit utilization rate and improve your credit score.
This strategy is an excellent alternative to opening up a new account since it won’t affect the average age of your accounts on your credit file.
6. Continuing To Use Lines Of Credit With High Interest Rates
Different accounts have different interest rates. Accounts with high interest rates can be challenging to pay off. High interest rates can cause your balance to keep going up despite making regular payments.
To avoid paying high interest rates, pay down your balance as quickly as possible. Once that line of credit is paid off, avoid using it if possible. Whenever you plan to carry a balance, use whichever account you have that has the lowest interest rate.
7. Continuing Credit Usage After Consolidating Debts
Whether you’ve paid down a line of credit bit by bit, or you’ve transferred your balance to an account with a lower interest rate, you may become tempted to use that line of credit again.
It may look like you’ve suddenly cleared up a significant amount of debt (whether you have paid down your balance or you’ve transferred your debt to a different card). However, it could be a big mistake.
If you’ve paid down your balance, your credit score will likely improve due to a lower credit utilization ratio. If you use the line of credit again, that will bring up your credit utilization number and drop all of your progress. You can end up racking up your debt again in no time.
Consider Taking a Debt Consolidation Loan
If you still have a lot of credit card debt, consider taking out a small consolidation loan. A consolidation loan allows you to pay off your credit card debt, replacing it with loan debt instead. There are few reasons why you might want to consider consolidating your credit card debt:
- Save money in the long run – Interest rates on credit cards are often much higher than on personal loans. You’ll save money on interest by the time you’ve paid off your consolidation loan.
- Make your debt easier to pay off – If you’re paying down multiple cards, it can be difficult to make a dent in your debt, especially if you have high balances with high interest rates.
Consolidating all of those debts into a single loan makes it much easier to pay off since you’ll be able to focus on making a single payment every month instead of multiple payments.
- Improve your credit score – First, removing your revolving debt will give you a big credit boost. Secondly, people are rewarded for having a credit mix. Adding a loan to your credit file can give you a slight credit score increase. Finally, because a single loan is easier to pay down than multiple credit cards, you’ll be less likely to miss payments.
8. Moving Too Much Money Around
If you routinely move money in or out of your checking account or are constantly making credit card balance transfers, it can make a mess of your credit history. Because lenders are suspicious about funds that come and go regularly (as opposed to those who leave their money where it is), any withdrawals over $1,000 need to be reported as “cash advances.”
In some cases, withdrawals under $10,000 may also count against you if they look like attempts to avoid being detected by creditors.
Ultimately, the more money you move around, the more red flags get raised for lenders. To prevent any damage from occurring to your credit report due simply to moving money around too much, limit the number of transactions you make in a given month.
9. Never Taking On Any Debt
Your attempts to increase your credit score may scare you away from taking on any more debt, even if you’re in good financial shape. A large balance can indeed hurt your credit score, but you can still use a portion of your available credit without running the risk of harming your report as long as you keep your credit utilization to 30 percent or under.
But not taking on any debt at all can also hurt your score. Lenders will wonder why you need to borrow money if you’re not using any of your available credit. And credit card issuers have been known to close inactive accounts with no balances on them without even notifying the account holders.
Consider these examples of how you can take on debt in a responsible way that can benefit your credit score:
Use a Secured Credit Card
Using a secured credit card can provide you with an account that will look good on your credit report and help you build credit. People with no credit to their name often use secured credit cards to begin building a credit history.
The way it works is simple: you put a security deposit down in return for being able to use the card. The line of credit you receive is equal to that deposit. You’ll need to pay your balance in full every month, and it’s those regular payments that will help to boost your score. In essence, a secured credit card is like a combination of a credit card and a debit card.
Diversify Your Debts
It helps to have more than one type of debt that you’re paying off. There are two types of debts you can take on: revolving debts and installment debts. Revolving debt is a line of credit that can grow bigger or smaller since you can continue to use your credit up to the established limit.
An installment debt is a fixed loan that you’ll be required to pay off within a set amount of time. Diversifying your debts helps improve your credit mix, which boosts your credit score by showing lenders that you can handle multiple types of debt.
Planning To Invest In Real Estate? Avoid Making These Credit Score Mistakes
As you can see, you can make many different mistakes that can hurt your credit score, making it even more difficult to secure financing for your real estate investments. Get to know how your credit history works and what actions can both improve and damage your credit score.
With such understanding, you’ll not only be able to work on improving your credit score (making it easier to qualify for real estate investment loans), but you’ll be able to avoid mistakenly hurting your score as well.