The real estate industry revolves around credit. For many buyers, a good credit score is essential to securing a loan with favorable terms. For renters, many landlords choose tenants based on their credit scores. With March National Credit Education Month, there’s no better time for real estate professionals to develop scripts and strategies focused on credit scores so their clients have the best chance at homeownership or leasing a rental property.
When it comes to credit scores, financial literacy is key. A real estate agent should provide all-encompassing support, which may include guiding them toward a higher credit score and a financially secure future. These tips should include the following:
Understanding credit scores – Consumers should understand the scoring system before tackling a low score or attempting to improve their finances. According to Experian, the scores run on a 300-850 scale. The score can differ depending on the system used.
For example, FICO uses the following scoring system:
- Very Poor (300-579)
- Fair (580-669)
- Good (670-739)
- Very Good (740-799)
- Exceptional (800-850)
VantageScore scores as follows:
- Very Poor (300-549)
- Poor (550-649)
- Fair (650-699)
- Good (700-749)
- Excellent (750-850)
Lenders use these scores as decision-making tools when considering an applicant’s ability to repay the loan.
Checking credit reports frequently – A credit score can vary from week to week according to credit bureau: Experian, TransUnion or Equifax. Consumer should consider checking reports on a yearly basis, at minimum, to ensure there are no errors that could potentially lower the score. Consumers should be aware, however, of how soft- and hard-credit inquiries impact credit scores. Clients can check their credit scores through any of the above credit reporting agencies—or through FICO-partnered credit card accounts—without worry, as these are soft inquiries that do not impact a credit score. If a lender or landlord is checking the score, however, it is considered a hard credit inquiry, which may drop the credit score by a few points.
Knowing what impacts a credit score – Missed payments can lower a credit score; staying on top of payments, and even paying over the required minimum each month, can improve it.
Keeping low credit card balances can also help. According to myFICO.com, amounts owed make up 30 percent of a FICO score. A low credit utilization ratio can help improve the score, as the credit is still being used but in a financially responsible way. A high utilization ratio can point to maxed out credit cards and mismanaged finances.
Consumers should also refrain from opening new accounts or closing lines of credit that are not being used. Every time a new account is opened, it counts as a hard credit check, which can lower a credit score. While this can help to balance the debt-to-credit ratio, having too many open accounts can be a red flag to lenders, and closing down lines of credit that are not being used can increase this ratio.
Seeking personal finance education – Of course, agents should always direct their clients to a financial professional for a more thorough education on managing finances and improving credit scores. The Federal Deposit Insurance Corporation (FDIC) offers a Money Smart program for low- and moderate-income persons that works to enhance financial skills by creating a positive banking relationship and sharing the basics of financial responsibility. The “Money Smart for Older Adults” program is also offered by the Consumer Financial Protection Bureau (CFPB) for individuals who are 62 and older.
Managing credit after a real estate transaction – Credit will continue to impact a client’s life even after they have accomplished their goals of homeownership or renting. For example, with homeowner’s insurance, premiums can be based on credit scores. Outside of real estate, good credit history can make buying or leasing a new car, or securing any type of loan, a lot easier. Higher scores can also translate into better rates from lenders.
Being aware of how credit impacts various segments will help consumers to be more financially savvy—just in time for Financial Literacy Month in April.