Building Credit Early for Real Estate
By Steven Li Want to buy your first house? Own multiple rental properties? There are a variety of reasons you would want to enter the real estate market. Cyan Baker, a recent college graduate, “decided to look into real estate because [she is] extremely interested in investing in [her] future and having financial security for [her] future family.” Regardless of the reason, early preparation is critical to start as it could save you thousands. Real estate investments typically involve purchasing properties with upfront down-payments and a mortgage, which is a loan used to help purchase the remaining cost of a property often with a 30-year agreement and set interest rate. This interest rate is dependent on your FICO score, a numerical estimation of your reliability with borrowing and paying back money. This is used by lenders to determine your level of risk, and eventually, your interest rate, which can be as low as 2% and as high as 18%. So how do you build your credit score? Your credit score is based on five categories: payment history, credit owed, length of credit, mix of credit and new credit. When it comes to starting credit, the most influential activities will come from your payment history (35%) and the amount of credit owed (30%) (MyFico. com). You can begin building credit by applying for a starter credit card with low-credit limits targeted at consumers with zero credit history. A common mistake when building credit is signing up for a retail store card in exchange for a short-term discount or benefit. Michael Montecinos, a banker at Wintrust Bank, says, “These credit cards are often limited with high interest [rates] and low credit [limits], [meaning] your credit utilization rate will often go above the recommended 30% and look bad on credit history.” A 2016 survey also revealed, “almost half of the surveyed store cards offered by major U.S. retailers had an [Annual Percentage Rate] APR of 25% or more” (CreditKarma). The journey to a strong credit score can be confusing, but is essential to learn. In the current market, a score of 700 could get you an interest rate of 4.30%, while an score of 760 could get you an interest rate at 4.08%. For the same 30-year mortgage of $350,000, this could mean a savings of $16,319 (Experian). Reach out to multiple banking institutions to learn more about credit.