The Basics of Financing and Credit

The Basics of Financing and Credit

For an income property investor, there’s probably nothing more essential than the ability to obtain financing. This is an extremely important element of income property investing, and it’s hugely dependent on your credit history.

Credit Reporting Companies

One of the most familiar components of good credit scores today are credit reporting companies. The primary function of these credit report companies is to function as a clearing house of sorts for financial information. There are three major credit reporting agencies:

  • Experion
  • TransUnion
  • Equifax

Lenders periodically send information on credit or loans to these agencies, who then compile the information and sell it to other lenders who are contemplating extending credit to you as a consumer. The resulting report contains important data on past and present residence, bill payments, employment history, and public records like bankruptcies and lawsuits.

Credit Reports

To best understand your credit score, it’s important to understand the information included in your credit reports. Four primary kinds of information are contained in credit scores:

Public records like bankruptcies, court judgments, foreclosures, divorces, and tax liens.

Credit accounts like merchant accounts, credit cards, mortgages, auto loans, student loans and more.

Accounts which have been referred to credit agencies for unpaid debt.

Inquiries made by providers in regard to a person applying for a loan, insurance, employment, a cell phone, and more.

FICO will compile a proprietary credit score for individuals drawn from the data of each of the three credit agencies. Lenders and others who need to verify a credit score rely on FICO for a standardized way to evaluate the credit of prospective borrowers. They will use this

to determine whether or not they should approve a loan, and at what interest rate. It’s strongly suggested to spend some time on, the FICO website, to verify your credit score.

Review Periodically

Because of the importance of having “good credit,” it’s crucial to perform periodic reviews of every credit agency associated with FICO to protect against identity theft and reporting errors. If you have bad credit, it’s possible to have credit histories “cleaned up,” so to speak. This comes with varying success, and can be somewhat risky. Many credit repair firms are ineffective or illegal.

Negative Credit Reports

The FCRA, or the Fair Credit Reporting Act was enacted by Congress in the 1970’s to ensure the confidentiality and accuracy

of credit reports. It works to prevent the improper use of this information, which is part of the reason why these “credit clean up” firms can be fairly risky.

Negative credit can stay on your credit report for up to seven years, and bankruptcies can stick to a report for even longer, up to ten years. For this reason, maintaining a good credit score is

extremely important for investors. Keep track of credit to build the kind of stable financial future that Jason Hartman recommends. (Top Image: Flickr | 401(K) 2012)

The Young Wealth Team