Aiming for a higher credit score? Put your rent payment to work.
There are pros and cons to everything in life — including renting a place to live. Those who like the idea of owning property say renting means losing the opportunity to build equity or to catch a tax break.
Those who rent often enjoy lower living costs in many situations, they don’t have to maintain the property, and they have the freedom and flexibility to change their living arrangement on a whim.
And now you can add one more check in the pro column for renting: Paying rent can build your credit score in a number of ways.
1. Put years on your credit clock
Even if you’re not a huge fan of using credit, you’ll benefit from having a history of successfully managing your finances. Whether or not it’s fair, institutions often use this measure to determine how financially responsible you are.
Depending on the situation, even having bad credit trumps having no credit at all — so it’s important to establish a credit history and work to build up your credit score. Paying rent allows you to do this if the management company or landlord of your rental unit reports data to the credit bureaus. (Not all landlords do this, so if building a credit history is one of your financial goals, be sure to ask!)
2. Make payments on time (and in full)
A large portion of your credit score is based on your track record of paying what you owe, and when you owe it. That includes any loans you have: Credit cards, student loans — and yes, your rent payments. The credit bureau Experian will consider your rental payment history when looking at this factor to calculate your total credit score.
Again, it’s important to check and see if your rental management company or landlord will submit this information about your payments being on time and in full to credit bureaus. If not, you can consider signing up with a rent payment service like ClearNow, RentTrack, or PayYourRent that works with Experian to report your payment history.
3. Use a credit card
Most likely, you can’t use a credit card to make a monthly mortgage payment, even if you have good credit and always pay your balances on time and in full. But you can use a credit card to pay rent, and this can help you boost your score if you do it wisely.
For one, using your credit card this way can help you maintain responsible habits around credit card usage — stick to putting only your necessary expenses on your cards so you build credit history, keep your accounts active, and get in the habit of paying the card off in full each month.
This helps diversify your credit usage too. Not only are you making the rent payment on time and in full, but you’re also putting another type of credit to work while you’re doing it. Showing that you can manage a variety of accounts might help your score.
One caveat here: Be careful that your monthly rent doesn’t eat up too much of your available credit each month.
That’s because another factor that impacts your credit score is your credit utilization ratio –-how much credit you use versus how much total credit you have. This ratio makes up 30% of how your score is calculated. The lower the ratio, the better for your score. If your rent will eat up a large chunk of your available credit, be sure to pay that off as soon as possible.
If you can wisely use your credit and develop good habits around money management, you can make paying rent do a little work for you by leveraging it to build and boost your credit score.
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