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How To Improve Your Credit Score & Secure Better Loan Terms – 8 Steps

Published Sunday, August 15, 2021
By Kevin Amolsch

If you have been trying to get a real estate investment loan, but your current credit score is not good enough to pass the lender’s underwriting requirements, take note of these quick tips on how to improve your credit score for securing better loan terms.

You want to get a real estate investment loan, but your credit score is not good enough for the lender to trust you. It can be hard to improve your credit score if you don’t know where to start. But there are some simple and effective ways that will help you raise it faster than you may suspect.

The first step is understanding what affects your credit score and how it’s calculated. Next, make sure any negative items on your report are updated with accurate information or removed altogether. Finally, work on paying off any outstanding debts as soon as possible so they no longer negatively impact your credit rating.

Why You Need Good Credit To Invest In Real Estate

There are many investments you can make to help build up your wealth. Real estate investing is one of the best. However, unless you have a good credit score, it will be very difficult or impossible to get financing for these projects.

A real estate investment loan requires approval from the lender based on certain criteria. But since most lenders are risk averse, they want to see excellent credit.

This means that many lenders may require a score of up to 720 or better before you will be considered for financing and approval on a new investment property.

A good place to start is understanding what affects your credit rating and how it’s calculated.

1. Check Your Credit Reports For Errors

Errors in your credit report can have a devastating effect on your score, and correcting the error will help to improve it. Fraudulent information might be present in your credit report, or the information may be correct but contain incorrect numerical data.

An error can occur at any point in the process of gathering and reporting on your credit details. Errors are often caused by negligence rather than fraud, so anyone who has missed a payment, even if it was only a couple of days late, could find that the information is reported incorrectly. One or more errors could be present in your credit report, and they could have a major effect on your score.

What are the different types of credit report errors?

The following is an overview of the most common credit report errors that can affect your score:

  • Mistakes in account opening or closing details.
  • Incorrect name and address information (which has changed, and so appears inaccurate).
  • Incorrectly reported late payments or missed payments.
  • Incorrect reporting of the size of balances on accounts – possibly untrue, if the creditor is unaware that you paid off a large balance.
  • Mistaking credit card debt for an instalment loan, student loan or mortgage.
  • Reporting any information that is not authorized by you.

Correcting Your Credit Report Errors

It’s necessary to go through your report carefully; no one else can do it on your behalf and the creditors are unlikely to do it themselves. You should start with your credit report for the last year, but if you’ve made any financial mistakes recently, it’s advisable to check your report back further.

The format of your report can vary from one agency to another. The main details will be clearly identified in an easy-to-read format; pay particular attention to any negative information.

2. Reducing Your Total Debt Helps Your Credit Score

Many people think that high credit card balances are the biggest factor damaging their credit score. You may be surprised to learn that one of the best ways you can boost your credit scores is simply to pay off your debt.

In fact, a study from FICO found that the single biggest factor in credit scores had to do with reducing total balances owed on credit cards and loans. In other words, paying down what you owe is worth more points than paying bills on time or anything else.

It’s true that accounts in good standing–those with no late payments or recent missed payments–also contribute to high credit scores. And it’s true that having a large variety of different types of accounts can also help raise your score.

However, paying down debt is potentially the fastest way to boost your score by increasing available credit limits and decreasing balances owed on loans.

Consider Consolidating Credit Card Debts

So if paying down debt is so important to a credit score, how do you go about it? If you have several different cards and loans, the best option would be to consolidate your debts.

Though it may sound like a lot of work (and require some upfront investment), consolidating all your balances onto one card or loan can be an effective way to reduce the debt you owe and improve your credit score at the same time.

You can also look into consolidating different debts onto a single low-interest loan, particularly if you have several student loans or car loans.

If you’ve been making regular monthly payments on time but are finding it hard to pay off your debt in the normal time period (say, 10 years), consolidating your high-interest debts onto a lower interest rate loan can save you money in the long run.

3. Make Sure Payments Are Made On Time And In Full

Even if you consolidate debts and pay them off, though, it won’t count towards your credit score unless each payment is on time and in full. Even one missed or late payment can be the difference between a low (or even bad) score and a high or excellent credit score.

How Your Payment History Affects Your Credit Score

Your payment history makes up for 35% of your FICO score. That means, even if you have never missed a single payment and have no debt, having good payments will help maintain or improve your score.

4. Don’t Close Out Lines Of Credit

Though you may be tempted to close a line of credit or two, it’s better to leave them open and keep the account in good standing.

One reason is that if you close your accounts, the value of available lines on all your accounts will drop–which could lower your credit score.

Part of your credit score is derived by the length of time your credit has been established. Closing accounts can reduce the length of time and hurt your score. Unless there is a financial reason, like annual fees, it typically is smart to leave accounts open even if you do not use them.

Another issue is that closing out an account completely means you have no way to access the account if you need it, which could be a problem if you ever do need credit in the future.

5. Request Credit Line Increases

If you have a good payment history, it’s very likely that your request will be granted–and an increase in the available credit limit can improve your score as well.

Remember that increasing the credit amount only affects your score if you do not increase your total balances owed.

Up to 30% of the information that makes up your score comes from amounts owed, so if you increase the amount of available credit without increasing what you owe, it will be a positive factor for your credit score (as long as your payments continue to be on time).

There is no magic formula for increasing your credit score, but the best thing you can do is pay off all your debts and keep paying them on time–and if you want, take advantage of any opportunities that arise to increase available credit.

6. Ask For Goodwill Adjustments

Another way to increase your credit score is to ask for a “goodwill adjustment” or a “reconsideration” on your account. But remember that this won’t work if you have missed payments, and it may not even work if you just want an increase in available credit–a goodwill adjustment is usually only granted when there’s an error in the reported information on your credit report.

For example, if your balance is incorrectly recorded as $0 when it’s actually $250 then you may be eligible for a goodwill adjustment–but even so, once the error has been corrected, your score won’t be impacted further by that account unless your payment history changes or you apply for new credit.

Goodwill adjustments are also only done by specific lenders and issuers, so your payment history is not the only factor in whether or not you can get one.

These goodwill adjustments are at the discretion of each credit bureau, and they will accept requests from any consumers who believe there is an error on their report, regardless of how good or bad their credit score is.

7. Request Collection Accounts Be Removed Once Paid

You can get a big boost in your FICO scores at TransUnion, Equifax, and Experian by having defaulted accounts removed from your report when they are paid. This will be different for each credit bureau, though, so keep that in mind if you want to request removal of these accounts.

8. Build Up Credit Profile If Needed

If, for whatever reason, you don’t have much of a credit history–or if your only credit accounts are just student loans or personal loans–it may be beneficial to open up some new low-credit-line (and preferably zero percent interest rate) accounts. This is more of an issue with FICO scores than it is with VantageScores, so it’s not something that will help with VantageScore.

In addition to opening up some new accounts, you can also request credit line increases on your existing accounts and improve your payment history. This way, your previous lack of a credit profile won’t be seen as a factor in the low score you currently have and once you do build up that history, your score will improve.

How Long Does It Take For These Changes To Reflect On Your Credit?

As mentioned earlier, you can see an effect on your FICO score in as little as four months. However, it is possible that some of the changes will already have been reflected in your score before that–credit bureau information is updated at least every 90 days for most accounts, so any change to your account since then should be reflected by now.

For the major credit bureaus, information is updated once a month , and scoring models are updated with this information about a week after it’s transmitted. So if your credit score doesn’t seem to be improving, check back after another month has passed.

It should also be noted that you’ll generally see bigger improvements in your FICO score than you’ll see in your VantageScore. Credit scores are very different from one another, and although they do have several important things in common.

The most significant difference is that FICO scores also take into consideration how much available credit you’re using, a factor which does not exist for VantageScores. For a more in-depth look at the distinctions between the two, read this article.

To reiterate, although increasing your credit limit and your available balance generally doesn’t help your score directly, it can improve it indirectly by making you appear more responsible to the scoring model.

Knowledge Is Power As Far As Your Credit And FICO Scores Are Concerned!

Are you looking for an active real estate lending firm who cares more about your deal and track record than your credit? Come see the Pine Financial Difference!