How do I preserve my credit score while investing in real estate?

[Jason Garrett]

For years I have had a credit score over 800.Now that I am investing in real estate, it is plummeting. I can’t find any articles or advice on how to preserve my credit score while investing. To understand what is happening, here is a brief description:

1997-We (my wife and I) bought a condo in Ponte Vedra Beach, Fl. We were in the military, so when we moved out, we just kept it and rented it out.(Positive Cash Flow)

2007-We were transferred to Hawaii where we bought a beautiful home with a detached Ohana (Mother-in-law suite). We moved away in 2015 and are renting it out.(Outstanding Cash Flow)

2017-We moved to the Pensacola, Fl area and bought our current home.(Credit score over 800)

2018-We committed to increasing our real estate holdings.In February we bought a condo in Pensacola, Fl. We put 20% down and financed the rest with a 30 year mortgage.(Positive Cash Flow) (Credit Score over 800)

2018-In February we refinanced our house in Hawaii.

2018-In March we refinanced our Condo in PV Beach.

2018-In May we bought a SFH in Central Alabama.We bought it with cash…purchase and rehab cost was $42K.It rents for $725/m.(Positive Cash Flow). (Credit Score over 800, but ownership of this property does not seem to be on my credit report)

2018-In June we bought a duplex in Mobile Alabama.We put down 20%, got a commercial loan and it was our first purchase in a newly formed LLC. (Credit Score probably over 800, but I never really checked during this purchase).We are finishing a rehab and are just starting to advertise for rent (Sept 5, 2018)

2018-In July we got a HELOC on our Hawaii House so we can start using it to buy property. We haven't used it yet, except for…see next line.

2018-In July, we rehabbed our Ponte Vedra condo.It’s done now and newly rented for double what we had been renting it for, so now it is providing not just positive cash flow, but outstanding cash flow.  Anyway, we used two credit cards to pay for the rehab. We put about 75% of the limit on each on those cards for about a month. (I’m assuming this is where the Credit Score got into issues).

2018-In the last few days of Aug or first few days of Sept, I paid off one credit card with cash on hand.I then wrote a check from the HELOC to pay off the other. All told, the HELOC has about $11,900 on it. That's less than 10% of the credit line. I then did a credit check on myself as I am getting ready to purchase a new build and found out that the credit companies did their monthly look at the exact moment where I had put the money on the HELOC, but my cash payment hadn't yet come off my credit cards. It looks like I had double the debt that I actually had. Now I have found out much to my horror that my credit score has plummeted in a matter of days from above 800 to between 720-740 between all three credit bureaus.

While I fully understand how credit scores work and what affects them, I’m not sure what you are supposed to do with credit if the use of it is so damaging. How are others using credit without damaging their credit scores? Is anyone else dealing with these issues? Sadly, I’m not seeing any discussions, articles, podcasts, or books on this subject.  It’s a real Catch 22…use your equity and credit to buy property, only to have a credit score damaged to the point that you’ll have trouble buying any more. Anyway, I’d love to hear what you all think or advise.

Jason Garrett

[Jay Helms]

Too many credit inquiries will have a negative affect on your credit score. Give it time and they'll roll off. Also might be worth while to comb through the details of your credit reports to ensure there aren't any erroneous claims on there. I had one recently, took me a few weeks to get it cleared up but instantly repaired my credit. 

[Jason Garrett]

Thanks, good thoughts there. You may very well be right about too many credit inquiries. I'm tying to be very careful before I request any more loans. I guess they stay on about a year and then roll off, so yes, I think that is definitely part of it. A few months back I did notice they had a credit card on my file that I didn't own. I was impressed with how fast that came off and there was a pretty good boost there. Still though, the use of credit seems to be a big hit, yet it takes the use of credit (HELOC, etc) to do some of the stuff I'm doing. I feel like I'm missing something here. Thanks again Jay. Jason

[Jason D.]

@Jason Garrett it's likely due to the timing of the credit score update. Most people (non real estate investors) dont use large chunks of credit like we do, so they dont see the fluctuations to their score like that. Mine will move up and down as much as 100 points, depending on what I'm doing. Theres nothing you can do about it besides try for non recourse loans, where your personal finances are not involved

[Jason Garrett]

Jason, thanks for commenting.  I truth, I didn't know if I was unique in these large credit score swings or if I was doing something wrong.  I appreciate you telling me that you also see large fluctuations in your credit score.  I guess if others are able to deal with it and  keep buying, then so can I.  Thanks again.  Jason 

[Kevin Hunter]

@Jason Garrett, it is common to see those fluctuations.  You obviously have substantial debt to income which affects it as well, and as you incur more debt, the credit score will decrease.  The big jumps definitely come though as a result of inquiries, revolving debt increases, etc...

[Steven Kleppin]

@Jason Garrett Experian still considers a score of 740 to be "very good", their second highest tier. When it's slightly below that you're still on the high end of "good". You're still likely to get good rates on financing and such. As long as your payment history has no blemishes, your rate will move towards 800 as 1) the "age" of your credit accounts increase and 2) the inquires fall off. 

If you are concerned that they took a snap-shot during that time when the HELOC money was paying off the credit card and can't wait till their next snap-shot, you can write to each of the agencies and submit proof and they really are good (in my experience) with correcting those things.

[Jason Garrett]

Kevin, thanks for the reply.  I'm glad I asked the question as I didn't know flucuations were so common.  I thought I was doing something wrong somewhere.  Jason

[Jason Garrett]

Steven, thanks for your comments.  Do you know if credit agencies take a look only once a month, or twice a month, or is it more random?  I seem to think they do it twice a month, but can't find anything to prove that.  I guess if there is one thing that I find very trying in real estate, it's patience.  I'm finding I want  things to happen instantly and they don't in this type of business.  Thanks again.  Jason

[Russell Brazil]

Originally posted by @Jason Garrett:

Steven, thanks for your comments.  Do you know if credit agencies take a look only once a month, or twice a month, or is it more random?  I seem to think they do it twice a month, but can't find anything to prove that.  I guess if there is one thing that I find very trying in real estate, it's patience.  I'm finding I want  things to happen instantly and they don't in this type of business.  Thanks again.  Jason

 Your credit report is updated every time a creditor reports to the bureaus. For instance every time you get a credit card bill, that new balance is reported. Every time you pay your mortgage, that new balance is reported.

However your score can change even with information staying the same as a component of your score is the average age of your accounts. And literally every day that average changes.

[Jason Garrett]

Fantastic, I didn't know that either.  So my creditors push the info to the credit bureaus instead of the credit bureaus pulling it from them.  Good to know.

Since you may know, I do have another related question:  You mentioned that every time I pay my mortgage, a new balance is reported.  One comment I notice on my reports says "The balances on your accounts are too high compared to loan amounts."  As I described above, I bought a condo in 1997 and paid it down to about $40,000 which meant I had a $93500 loan paid all the way down to $40,000.  When I refinanced it for a much lower interest rate earlier this year, it changed that loan to look like I had a loan for $40,000 and still owed $38,000.  Thinking it though, can refinancing a loan hurt your credit as well?  Jason