A good credit score for financing investment properties is a very crucial asset for any real estate investor seeking to borrow from credit unions or banks. Credit history is vital for mortgage lenders since it determines the level of risk you pose to them. It offers a statistical method of establishing the chances of a borrower repaying their loan.
Having ‘no credit’ implies that you don’t have a record of borrowing money and paying it back. However, this should not be confused with having ‘bad credit’ which means that you took a loan and failed to pay it back as agreed. If an investor has ‘no credit’ or ‘bad credit’, financial institutions will be reluctant to approve loans for financing real estate. Therefore, learning how to build credit is very important for any real estate investor.
Related: What Is a Good Credit Score for Real Estate Investors?
Here is how to build credit when you have none:
1. Become an Authorized User or Get a Co-Signer
If you have a trusted relative or friend with a great credit score, you could ask them to add you as an authorized user or co-signer on their account.
Being an authorized user on someone’s credit card allows you to build a positive credit history without taking responsibility for the debt. However, if the card owner accumulates large credit card utilization or defaults on payment, you will get a bad credit report. So, before becoming an authorized user, find out what the credit card will be used for. In addition, you should establish the card owner’s history of paying on time and in full.
Co-signing is another good option for real estate investors. This is when someone with excellent credit agrees to enter into a joint ownership arrangement with another party that has low credit. The co-signer accepts to take responsibility in case the other defaults on the loan or misses a payment.
If you decide to pursue one of these options, be sure to remove yourself from the credit card or loan as soon as your credit improves.
2. Apply for a Secured Card
A great way to establish and build a credit score is to get one or two ‘secured’ credit cards specifically intended to build a positive credit history. Just go on Google and type in, for example, ‘best secured credit cards 2019.’ It’s like a normal credit card, but with a generally lower spending limit, and it’s backed by a deposit you initially put down as collateral to secure your use of the card.
–Matt Israel, real estate agent at Triplemint
Anyone can learn how to build credit with a credit card. A real estate investor can place deposits ranging from $200 to $2000. This money is placed into a certificate of deposit, money market or savings account where it will accumulate normal interest. Upon closing your card account, the bank will refund your deposit.
It can be hard to first start building credit, but I highly recommend opening up a credit card and just putting one subscription service you have to start. For example, just put your Netflix subscription on that card and store it away. Then set up automatic payments and set a reminder so you never forget a payment.
–Ashley Koide, real estate agent at Triplemint
Please note that failing to pay your balance on time will have an adverse effect on your credit score. Just because you have a deposit doesn’t mean that you should take paying your monthly bill lightly.
3. Get a Credit Building Loan
Traditional loans involve borrowing money and then repaying it. However, credit building loans work in the opposite. Once you get approved for the loan, you will be required to pay it off first before accessing the money. While you are making the payments, the loan will be kept in a special account that you cannot access. However, this strategy is risky since defaulting could result in losing your payments as well as getting a negative credit report.
Related: 6 Types of Loans for Investment Properties in Real Estate
4. Apply for a Store Credit Card
When you have no credit history, it is much easier to get approved for store credit cards than traditional credit cards. Some store cards offer a small percentage off of your purchases, while others even come with free shipping for online shopping. However, it should be noted that the interest on these cards is often very high. Therefore, keep your expenses low and avoid buying things you don’t need.
5. Pay Your Bills in Full and On Time
When it comes to building credit, one of the best tips for property investors is to make use of utility payments and rent. There are companies out there that will collect your rent, pay the landlord on your behalf, and then report your timely payment to credit agencies. Some utility companies will also report to credit agencies when you pay in full and on time. This is a simple and effective strategy for how to build credit.
6. Pay Your Student Loans
For most people thinking of how to build credit, the struggle begins with their student loans. Failing to pay your student loans can have a very detrimental effect on your credit score. The good news is that students that are struggling financially can explore options such as payment suspensions, hardship referrals, or income-based repayment.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
Conclusion
Though it may appear to be an intimidating task, building credit from scratch is much less stressful than attempting to rebuild bad credit. How long does it take to build good credit? It could take just a few months if you diligently apply the tips on how to build credit fast.
As you apply the tips on how to build credit when you have none, be sure to check your score regularly. You can expect to receive an annual credit report from the three national credit reporting agencies – TransUnion, Equifax, and Experian. Since credit bureaus update their reports on a monthly basis, you could also obtain your credit score from your credit card provider, bank or other independent companies.
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