Are You Ready to Build Your Credit?
Many renters are actively working toward building up their credit score to purchase a home in the future.
In fact, the majority of renters say that homeownership is among their priorities for the future.
There are two significant hurdles to becoming a homeowner: having the credit score to get approved for a favorable mortgage, and saving up enough money for a down payment.
With a good credit score, you’ll be able to get a better mortgage rate. So before you start to save up, you should know how rent payments affect your credit score.
Here’s how renters can build credit while leasing an apartment.
Report Your Rent Payments to Credit Bureaus
Rent payments are supposed to be considered a tradeline on your credit report, similar to a mortgage or other loan.
But the majority of property managers do not report rent payments to credit bureaus.
According to one FICO spokesperson, less than 1% of credit files contain rental information!
By reporting on-time rent payments, you can help improve your score and be able to take advantage of better financing opportunities in the future.
How It Works
Here at DARO Apartments, we give our tenants the option to enroll in the Rent Plus program, which automatically reports on-time rent payments to select credit bureaus.
The Rent Plus program verifies the rent payments with the landlord and reports them to select credit agencies.
It also provides some additional services such as text message reminders when your rent is due.
For just $4.99 a month per person, you can have each rent payment reported. Additionally, you can have up to 24 months of previous payments reported for a small fee.
If you have a short credit history and few open trade-line accounts, this is perfect for you. The program offers a way to build credit just by making the rent payments you were already making.
If You Don’t Have One Already, Apply For a Credit Card
Responsible use of a credit card will help you rapidly accelerate your credit score. For those who have a low credit history or low credit scores, there are a number of cards out there that market themselves to low or no-credit customers.
You might also consider a secured credit card.
With these cards, you make a cash deposit for an amount usually equal to the credit limit. This deposit is used to collateralize the card if you don’t make payments, which allows lenders to approve less qualified applicants.
When you close the account, you will get your deposit back.
To build positive credit using a credit card, it is essential that you pay the card’s balance in full each month. This way, you avoid paying interest and quickly build your credit score.
Become an Authorized User on Somebody Else’s Credit Card
Rather than opening a new credit card account, you can become an authorized user on a family member or significant other’s credit card.
Becoming an authorized user will allow you to build a history of on-time payments.
And you don’t have to deal with the negative impact of a hard inquiry on your credit card that comes with opening a new account.
Don’t Close Old Accounts
A big part of your credit score is your credit age.
Your credit age makes up approximately 15% of your score. If you have credit accounts that have been open for many years, don’t close them even if you never use them.
When these accounts are closed, your average credit age goes down, impacting your score.
Always Make Payments on Time
This tip applies to credit accounts as well as rent payments.
The most significant impact on your credit score is your history of making payments on-time. This history accounts for about 35% of your overall score.
Late payments will hurt your score and can be incredibly difficult to repair should it happen multiple times.
If you accidentally make a payment late, call your creditor immediately. Explain your mistake, make the payment, and they might not report the late payment to the credit bureaus.
Don’t Open Too Many New Accounts
This is called a “hard inquiry,” and each one has a minor negative impact on your score. Racking up a whole bunch of inquiries in a short amount of time will lower your score.
Like we discussed earlier, opening new accounts will lower your average credit age.
Also, every time you apply for credit, – whether it’s a credit card, auto loan, or anything else – that lender will check your credit.
When a lender checks your credit, it’s called a “hard inquiry.” Each hard inquiry has a minor negative impact on your score. But those negative impacts might build up.
So racking up a whole bunch of inquiries in a short amount of time will lower your score.
Don’t Use All of Your Available Credit
The second-largest factor of your credit score is your credit utilization ratio. This is the ratio of available credit you have to the amount you are using.
If you have one credit card with a $3,000 balance and you carry a balance of $1,500 on the card, your credit utilization ratio would be 50%.
A good rule of thumb is to keep your utilization under 30%.
Doing this shows your credit company that you know how to manage your money, which boosts your score.
On the flip side, using the majority of your credit tells lenders that you might be in significant financial trouble.
So, always keep a close eye on your balance.
Building Credit for Homeownership as a Renter
This is our list of dos and don’ts. With enough diligence, you can have a shiny credit score, perfect for buying a home.
One of the most important things to remember is to make sure your property manager is reporting your rent payments to credit bureaus. Otherwise, you’re missing out on valuable credit history.
Because you have to make these rent payments anyway, enrolling in a program like Rent Plus is one of the easiest and most affordable ways to start increasing that score.
Some of our residents have seen an increase of over 100 points on their score while living with us.If you would like more information about the Rent Plus Program, don’t hesitate to reach out to DARO Apartments today. We are more than happy to answer any additional questions you have.