How to Reduce Your Debt and Improve Your Credit

Real estate investors spend thousands of dollars learning state of the art investing techniques, receive one on one coaching, and spend countless hours driving their local neighborhoods learning all they can about the ins and outs of their local real estate markets.  Then they make the painful discovery that the one thing holding them back wouldn’t have cost them a thing.

I’m talking about your credit.

As banks and other lenders tighten their lending requirements, real estate investors need to take another look at their own finances and what they can do to improve their overall credit situation to make achieving real estate investing success a possibility instead of a pipe dream.

If you’re like the average real estate investor, what’s holding you back probably isn’t a credit report battered and bruised by a spotty payment history.  Instead, what’s preventing you from reaching your immediate goal is poor credit utilization – or simply having too much debt.

Poor credit utilization is easier to correct than you might think, especially when you know exactly what it is that most lenders are looking for.  They like to see your existing account balances at or below 35% of your total credit limit.  Pretend for a second that you have three credit cards – all with a $5,000 credit limit.  If your balances on the three cards are $1100, $1800, and $200, you’re hurting your chances of getting that coveted loan approval.

The reason for this is simple:  Poor utilization.  While credit card numbers one and three are under the 35% threshold, number two is at 72%.

There’s a quick and easy solution to this problem.  Simply transfer part of the balance from the credit card with the $1800 balance to the card with the $200 balance.  You will probably pay a balance transfer fee for the privilege, but in the long run your credit report will be better off for it.  It won’t be a major FICO score bounce, but a few points can mean the difference between an approval and a form letter.

If your problem is simply having too much debt, you’ll need to pay some of it off so you can start reaping the financial rewards available to real estate investors in control of their destiny.  The number one area real estate investors (and all Americans for that matter) overextend themselves is in the area of credit card debt.  If this is your situation there are a couple of different ways for you to tackle this debt.

The first way is by tapping into the equity in your home and paying off the credit cards with the proceeds.  If you take this approach, you’ll want to consider closing the accounts to reap the maximum benefit of a bump in your credit score.  Open accounts with a zero balance won’t help your credit score nearly as much as closed accounts without a balance.  The reason for this is simple:  If the account is still open you have the potential to borrow up to the amount of your credit limit any time you like. 

I know that you might be interested in using access to credit card cash advances for short term financing needs, but I’m telling you that closing accounts will improve your credit score. If you ultimately decide to keep the account open so you have access to cash advances, that’s your business.  However, doing so probably isn’t in your best interest, especially when you’re just starting down Real Estate Investing Road.

If you don’t have home equity you can tap into to reduce your debt load and improve your credit, you’ll have to find another way.  The fastest way of doing this is by adding up all of the balances on your credit cards – largest to smallest, irrespective of your interest rates.  I know this flies in the face of the advice given by others who tell you to rank them according to interest rate.

Pay off the balance with the lowest balance first while making the minimum monthly payment on the other cards.  Then take the amount you were applying to the lowest card and apply it to the next higher balance on your list.  When you pay it off, move to the next one and continue the cycle until you have each card paid off.  The reason I recommend you ignore your APR is because this strategy provides you a quick moral victory. While largely psychological, it can have a profound impact on your overall credit picture because you’ll likely see each small victory as proof positive that you’re doing something to get out of debt.

These are just a couple of the ways you can reduce your debt load and improve your credit situation.  By improving your credit and raising your FICO score you can exponentially increase your chances of seeing your loan application approved.

Do everything in your power to improve your credit situation.  Don’t forget to do some of the other things that will help guarantee you reach your real estate investing destination.  By combining effective investing strategies with credit improvement practices you’ll get where you’re going much more quickly.

Then you won’t use the current credit situation as a crutch to explain away why you haven’t reached your goals. You’ll know that you will have managed to pull something off that multiple Fortune 500 companies couldn’t: You’ll be thriving in a tough market.

And that’s saying something.  Because you will have done it without a huge government bailout.