The higher your credit score is, the easier it is to get funding for an investment property. Your credit score determines the size of the necessary down payment, the interest rate, and closing fees. A high credit score indicates that you are financially responsible and gives lenders the indication that you can handle another debt on your shoulders
The keys to a good credit score are paying your bills on time, having a mix of accounts (credit cards and loans), and keeping these accounts in good standing for many years.
But, have you ever wondered: How does credit work? Why do you need a credit report, anyway?
Why do we have credit reports and scores?
“The credit history reporting system helps banks avoid lending money to customers who are already overextended or who have a history of not paying their debts.
Less than 100 years ago, banking was a very personal experience. If you wanted to borrow money, you would need to walk into a local bank and personally convince a loan officer to give you the loan. You would have needed to show proof of employment and, quite possibly, personal references who could vouch for your character.
Back then, nearly all lending was secured, meaning you would need to put up collateral in order to take out the loan. The most common example of a secured loan is a home mortgage in which the bank takes an interest in the property.
Since then, the rise of credit cards as a convenient, electronic purchasing tool has made unsecured lending quite common. And although unsecured lending can be more profitable for banks, it’s also highly risky because there’s no collateral for the bank to repossess if the debtor doesn’t pay back the loan.
As a result, the credit report system was created to give banks a centralized source of information about potential borrowers.”