Building strong credit

[Drew Moyer]

hey guys not currently in real estate investing but learning and trying to prepare myself for best success. Currently in school saving and investing in stock market and just recently got a credit card to try to build a good credit. Anybody have any tips to increase and build a good credit score 

[Christopher Phillips]

@Drew Moyer

First, learn about the ins and outs of the FICO score.

When thinking about credit scores and borrowing, it's about trying to get the best loan type for the situation, loan size, loan terms, and the best interest rate.

Some context for loans:

For conventional loans, 20% down payment minimum credit score is around 620. If you are putting down less than 20%, you'll have to pay Private Mortgage Insurance (PMI). You want to really be above 740. As you move below 720 the PMI rates go up.

For FHA, minimum FICO is 580 for 3.5% down payment. 10% down payment if your score is below 580. FHA includes a Mortgage Insurance Premium (MIP). Upfront payment at closing and monthly payments.

Working on your score:

Start by looking at your current credit. Many of the reporting agencies offer free reports once per year, or you can use one of the free services like Credit Karma (just understand their limitations).

When you're in school, many card companies will start sending you invitations if they haven't done so already. It's okay to have credit cards, but to maintain a good score you have to make sure you pay your bills on time and not utilize more than 30% of any one card to maintain the best FICO rating. This 30% is why it's best to avoid department store cards. The available credit limit is usually small, so a few purchases around the holidays will max them out.

If you have very new/young credit history, you are starting out with a clean slate. So, try to maintain it by paying all your bills on time.

At a minimum, you want to have at least 1 trade line (account) to produce a FICO score. Ideally, you should have 2-3 trade lines with good history of paying on time and managing your balances. Since you are in school, you are probably already starting with some history.

As far as borrowing money in the future, you also have to consider the Debt To Income (DTI) ratio and the 28/36 rule. Lenders look at monthly gross income. They will normally consider 28% of your monthly gross income for the house expenses (principal, interest, taxes, and insurance) and 36% for total debt related expenses (including student loan payments, car loan, personal loan, alimony).

This is when you're trying to get the best conventional loan with the best rate. There's more flexibility if you are using FHA or VA loans.

You also have to consider your long term plans. If you plan to invest in the next 5 years, as an example, having a car loan at that time will impact your total debts. So, you'd want to have a new car loan paid off by then, or have a cheaper used car purchased without a loan.

This is just scratching at the surface. Hope it helps.