Bad credit happens to the best of us. A few late payments or a personal crisis can change your credit score for the worse. Fortunately, bad credit can be fixed with diligence and a few key steps. If you have equity, having bad credit doesn’t mean you can’t get a loan or invest in real estate.

How Does Bad Credit Happen?

A credit score may seem like just a number on a page, but when it drops below a certain level, it can have a major impact on your life. Credit bureaus use five factors to determine credit scores:

1. Payment History (35 percent)

Because it carries the most weight, a poor payment history can be devastating for your credit. Even if you have had bad payment habits in the past, it’s never too late to start paying on time, even if you’re just making the minimum payment. 

2. Credit Utilization (30 percent)

This is the percentage of available credit you have across all your credit accounts. Aim for the low single digits to keep your credit score high. 

3. Credit Age (15 percent) 

If you have less than seven years of credit history, your score will automatically be lower than that of someone with a longer history. If you’re a young investor, get a credit card if you don’t already have one.  

4. New Applications (10 percent)

Every time you apply for a new credit card, it hurts your score for a short period of time. This might be unavoidable, but fortunately, the impact on your overall credit score is relatively low. 

5. Types of Credit (10 percent)

It is good for your credit score if you have a mix of different types of credit, including:

  • Revolving: A line of credit with a cap that usually requires monthly payments, like a credit card or home equity line of credit 
  • Open: Charge accounts you can borrow from that must be paid back in full each month
  • Installment: Loans with a fixed payment schedule, which includes most types of loans
Have you been turned down for a bank loan? Find out why commercial real estate  lenders are turning to hard-money loans ➤

How to Fix Bad Credit

By being thoughtful and proactive, you can fix a bad credit score over time. Here are some ways to address each of the five factors listed above.

1. Payment History

If you have a poor payment history, work toward making consistent, on-time payments. If you’re able, hit the reset button by getting a loan to pay off all your credit cards, and make consistent monthly payments on the loan to rebuild your payment history.

2. Credit Utilization

Know your overall credit limit across all cards and sources, and keep your total balance below 10 percent. If you are a heavy credit card user and pay them off every month, consider making payments before statements are received to keep the reported balance low. It’s also not good to have 0 percent utilization, so tap into your credit periodically to maintain a low utilization rate. 

3. Credit Age

This is one factor that you cannot control; it just takes time. If you can, start young to build good credit.

4. New Applications

Limit the number of new credit applications you submit in a short period of time. When possible, try to do only one or two credit inquiries in a 12-month period.

5. Types of Credit

Strive to have a variety of types of credit available to you. When in doubt, don't close out a credit card—doing so can negatively impact your score.

Getting a Loan with Bad Credit

Many people with bad credit feel like they’re limited to borrowing from friends and family, which may not always be a possibility. It also potentially comes with its own drawbacks. Although many lenders have credit score requirements, not all do. 

Don’t let bad credit deter you from chasing your real estate investment goals. Hard money lenders offer unconventional financing options and are not subject to the same restrictions as conventional banks, so you may have options even if you have bad credit. Hard money lenders base loan eligibility largely on equity, so if you own property and have a certain amount of equity, you may be able to secure a loan. The loan types you can get from a hard money lender vary significantly, so whether you are a real estate investor or just need to cover a gap, you have options, including;

Explore Your Lending Options with Socotra Capital

The bottom line is, if you have bad credit, it’s never too late to fix it. In the meantime, you have lending options for real estate investment with Socotra Capital. When we consider a loan, we look at your equity and the deal you’re considering, not your credit history. If you have had trouble getting a loan because of bad credit, give us a call to see what’s possible. 

Our free guide provides even more useful tips for securing a loan from a hard money lender. Download The Borrower’s Guide: Process, Preparedness, and Timeline today.

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