As the old adage goes, “Rome wasn’t built in a day.” Likewise, good credit cannot be built overnight. Why does it matter, you ask? I’ll tell you why…
Credit score is one of the most important factors when applying for a rental property (along with income and rental history). It allows a landlord to review your current and past financial obligations and determine whether you are likely to pay rent on time based on prior payment history.
Although a perfect score is not required, it certainly helps your application status if you have good credit. For those who have low scores or no credit at all, you may want to consider building your credit sooner than later if you are considering applying for a rental property.
Read on for 5 tips to help raise your credit score or start building credit if you don’t have any currently.
1. Get a copy of your credit report
First and foremost, you need to know what you’re working with before you can attempt to make any changes and that will require pulling your own credit. Be cautious about which site(s) you use to do this as many appear to be “free” at first glance, but the fine print says otherwise.
According the the Federal Trade Commission website, “The law allows you to order one free copy of your report from each of the nationwide credit reporting companies every 12 months.” However, there is an exception at the moment that works in your favor. “Through the pandemic, everyone in the U.S. can get a free credit report each week from all three national credit reporting agencies (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.”
Take advantage of this opportunity to review your credit report and see what could be holding you back from getting approved for your next rental property.
2. Pay off any collections or past due balances
Once you have obtained your credit report(s) from one or all three of the national credit reporting agencies, take a look at what’s on there so you know how to move forward. Take note of your credit score, number and status of revolving accounts, installment accounts and any collections you may be unaware of.
If you have accounts that are showing they are currently late, try to get caught up on them with a payment plan or a lump sum payment. Bringing your account status up to date will help raise your credit score. If you have any accounts currently in collections, get them paid off immediately! Aside from medical debt and student loans, accounts in collections are an automatic disqualification in terms of rental application approval for most property management companies.
Get these items taken care of immediately before moving on to the next step.
3. Open a new revolving or installment account
This may seem counterintuitive since opening a new line of credit typically requires a hard credit check, which can negatively affect your overall score for the short term, but it’s still a viable option for those with little or no credit at all.
If you are going to open a new revolving account, be sure to keep the following in mind:
- Pay off your balance in full each month – To avoid interest charges and a potential debt situation, always pay off your balance in full every month. If you can’t do that, try to pay as much as possible so you’re not digging yourself a financial hole. Remember, you’re trying to build credit, not debt.
- Don’t close your old accounts – If you opened up a credit card when you turned 18 and haven’t used it in a couple years, don’t close it just yet. Instead, charge something to it to be sure the creditor doesn’t close the account and then pay it off immediately. Closed accounts, whether done intentionally or by default of too much time passing without use, can impact your score adversely.
- Be mindful of your spending – Don’t get ahead of yourself and start putting all purchases on your new credit card just because you can. This could have unfavorable implications depending on what your credit limit is. More on that below.
4. Increase your credit limit
If you already have one or more revolving credit accounts (i.e. credit cards), consider requesting a credit limit increase instead of applying for a new card. This will increase the funds available to you without the need to apply for a new account. And if you already use that card regularly, it will help with your credit utilization ratio.
What is credit utilization ratio? Glad you asked! Your credit utilization ratio (or credit utilization rate) is “the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. In other words, it’s how much you currently owe divided by your credit limit.” (source: Experian.com)
Credit agencies often use your credit utilization rate as a means of determining your credit score, and thus your creditworthiness. Depending on the method used, it can account for up to 30% of your overall credit score! Ideally, you want to have a low credit utilization rate as this is synonymous with a low balance to credit ratio. If you are looking to improve your score, plan to keep your credit card balance below 30% of the available limit.
Increasing your credit limit can raise your score by essentially making it look like you are not overspending or maxing out your credit cards. This is a great option for those with current revolving accounts.
5. Correct any errors on your account
Derogatory marks on your credit report can harm your score and should be taken care of as soon as they are noticed. As mentioned in #2 above, if the negative mark is a result of a late payment or collection you are at fault for, try to set up a payment plan or pay it in full as soon as possible.
If there is an item on your credit report that looks unfamiliar or you know shouldn’t be there, you can dispute it with the credit agency directly. Unless they consider your dispute trivial, they are required to investigate and provide you with a written report showing the result.
Once the errors have been taken care of, you should slowly start to see an improvement in your credit score.
Credit can be a highly beneficial tool to help show you are capable of managing your money, which puts you at an advantage when it comes to applying for a rental property. It can also be detrimental to your application if you have little to no credit, or have mismanaged your accounts in the past.
If you are considering applying for a rental property in the future, go ahead and pull your credit report and start implementing some of these tips to ensure you are at the top of the applicant list when the time comes. We’ll be rooting for you!
