Credit Score Dropped 85 points

12 Replies

Just finished my Second property using the BRRRR Strategy under my personal name. However ran into a issue with my credit which cost me some cash. It dropped about 85 points within 2 months.

I leveraged accounts I had on hand. Did not have to much in savings but my salary could manage the monthly payments. 

I used a Hard Money Lender 12% 3 year (Amortized at 10 yr), Personal 30k Line of Credit 8% Interest, 30k Credit Card Line 4% Interest Balance Transfer Offer w/ Credit Union no transfer fee, wrote myself a check.

65k Purchase Price
10k in Closing costs (Including the Hard Money Loan fees, Title costs and the escrow in taxes and insurance). The Hard Money Loan required 35% down but the only document they required was a credit check. Before I did this transaction, my credit score was 755. 

26k approx Renovations
135k Appraisal
75% Cash out with about 3k in refinance costs.

730 Mortgage w/ Insurance/Tax
Rented at $1350

My mortgage broker advised me if I want to get the best rates for an investment refinance (Fannie Mae/Freddie Mac) I had to have at least a credit score of 680 which I missed. My credit dropped to 670. So my interest on the refinance 30yr mortgage was 1.125% higher. Ended up refinancing at 5.125% could of been around 4%. However, I was able to pay off the lines of credit as well as the original hard money loan. 

I understand its unsecured debt, and half of it was essentially credit card debt but my question is does anyone else experience this? I do have another mortgage, some regular debt and I know my DTI was hit hard. I am 24 yrs old so my credit history isn't as long as lets say a 30 yr olds but I am trying to build a line of credit with my bank high enough so I don't have to leverage different accounts. If anyone has any advise in this matter Id appreciate it.

@James Cloman as you are finding out, the percentage of credit utilization is important to your credit score. If you have a credit card with a $10K limit, it is best to keep the balance below 20-25%. If you have maxed out it will make a big difference.

The good news is that as you pay down those lines your credit score can go up relatively quickly. CC companies want you to extend credit. So if you use high credit and then pay it down they may be willing to raise your limit.

A great place to understand credit scores is the Fico Forums found at MyFico.com.

@James Cloman The good thing is that FICO/Credit scores don't have a "memory" so to speak. That means, even if your score takes a hit for one or two months, if you have, say a DTI that is at a high 85% because of the properties you've gotten, and the debt you've secured, but over the course of two to three months you significantly reduce that debt, and get to under 30%, your credit scores will rebound and go back up. An example may be that you may have a credit card that has a 20k limit, and for one month, you have to use 19k of that to do buy some rehab materials. Your credit will take a significant hit, because it will show you are using 95% of your credit. Your score will drop; however, if you pay that off by the next billing cycle (before your statement cuts), it will report to the credit reporting agencies back to your 0 balance, thus increasing your credit score back up.

In your situation, depending on how fast you can get your DTI back under a certain %, then your scores will rebound. It's hard to say they'll go up by the exact amount of points that you lost, because there are various factors that come into play with your credit score, and each are weighted differently. Credit card info is based on payment history and % of usage and are about 35% of your credit score, which is a lot. Your average age of accounts is a pretty significant % of your credit score (which means if you had two credit cards and your average age of accounts was 8 years, but then you apply for 4 new credit cards today, your average age of accounts will take a hit thus causing a drop in your credit score too).

All of these things are strange algorithms that credit reporting agencies use to create your score. So, the number of inquiries you have on your credit report; average age of accounts; amount of debt, as well as your on time payment history, and % of credit that you are utilizing at any given time, are all factors that are taken into account. Also, closed end debts like car loans or installment loans are factored a bit differently than credit cards, which are open-ended credit products, but are still a part of of your overall credit score.

There are some good websites out there that assist people with understanding credit. They are free, and you can ask questions that are specific to your situation. As with anything though, when it's an open forum you do have to vet the information you receive, as it all isn't good...my .02.

Good luck!

@Russell Brazil I was going to state that site too, but I wasn't sure if we could list it here!

What is the site you're referring to for advise on credit? 

Thanks guys. I forgot to mention I do have other credit accounts with no balances. I didn't think of it because I was to worried about doing the deal. Found out the hard way. Did look into the utilization rates though. 

I'm curious on how people manage larger lines of credit

Originally posted by @Chanté Owens :

@James Cloman The good thing is that FICO/Credit scores don't have a "memory" so to speak. That means, even if your score takes a hit for one or two months, if you have, say a DTI that is at a high 85% because of the properties you've gotten, and the debt you've secured, but over the course of two to three months you significantly reduce that debt, and get to under 30%, your credit scores will rebound and go back up. An example may be that you may have a credit card that has a 20k limit, and for one month, you have to use 19k of that to do buy some rehab materials. Your credit will take a significant hit, because it will show you are using 95% of your credit. Your score will drop; however, if you pay that off by the next billing cycle (before your statement cuts), it will report to the credit reporting agencies back to your 0 balance, thus increasing your credit score back up.

In your situation, depending on how fast you can get your DTI back under a certain %, then your scores will rebound. It's hard to say they'll go up by the exact amount of points that you lost, because there are various factors that come into play with your credit score, and each are weighted differently. Credit card info is based on payment history and % of usage and are about 35% of your credit score, which is a lot. Your average age of accounts is a pretty significant % of your credit score (which means if you had two credit cards and your average age of accounts was 8 years, but then you apply for 4 new credit cards today, your average age of accounts will take a hit thus causing a drop in your credit score too).

All of these things are strange algorithms that credit reporting agencies use to create your score. So, the number of inquiries you have on your credit report; average age of accounts; amount of debt, as well as your on time payment history, and % of credit that you are utilizing at any given time, are all factors that are taken into account. Also, closed end debts like car loans or installment loans are factored a bit differently than credit cards, which are open-ended credit products, but are still a part of of your overall credit score.

There are some good websites out there that assist people with understanding credit. They are free, and you can ask questions that are specific to your situation. As with anything though, when it's an open forum you do have to vet the information you receive, as it all isn't good...my .02.

Good luck!

 Excellent post! I will add one minor caveat to "Fico scores don't have a memory"

Absolutely true in regards to month to month utilization for the bulk of the score fluctuations that will occur however, there is a minor subset algorithm that takes into account utilization over time e.g. Carrying high util for several months will result in a lower score than if you had corrected high util the very next month. A better source than myfico for results based study of Fico effects is creditboards especially the stickied Master topics. myfico forums are a bit restricted in discussing certain things as they are owned by Fico.

Our credit score got hit even with decades of great credit as they said too many new inquiries and too many newer loans (and it was only 3 home loans in a 2-year period).  Our score went down drastically, and only came back after the inquiries disappeared (2 years, I think) and no new loans in 2 years, so not sure which one had the most effect.  We were shopping for mortgages thinking if it was for the one purchase, it would only count against us once, but that's apparently only if it's in the same 2 weeks, so each inquiry counted against us, especially as lender said we should keep our pre-approval active so they'd pull another credit check every 3 months or so, and we went almost a year before actually finding a deal worth buying.  We are now extremely careful of any inquiries and will expect our score to drop again at the next purchase.        

@Jerry Bruckenheimer I was thinking of that forum too; however, I wasn't sure if we could mention either of the two big ones on here or not, so I just refrained, but you and another person have mentioned them, so that's good =)

You are right, there are many variables that go into credit scores; too many to mention in one post, plus I don't know all of them, as some are "secret".

@Lynn M. Yeah, I've heard conflicting things on the two week period of looking for mortgage/auto loans and having them report as only one. Some sources say that's not true, others say it is...I'm not certain. One thing I recommend for anyone to know is that more often than not, ANY time you are looking to secure credit/loan, your credit report will likely be pulled, and COULD take a hit. Every situation is different and varies significantly.

James Cloman credit karma has a simulator tool, you can make some adjustments and see how it affects your score. It should give you an ideal on what you can do to raise it.

@James Cloman  This may have been mentioned, but once your credit score rebounds from paying off the temporary unsecured debt, find a lender that will do a rate and term refinance with no closing costs to help lower your long-term interest rate.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here