How Does Apartment Rent Payment History Affect Your Credit Score?
Your credit score matters in more ways than, especially if you’re trying to find a place to rent. Before you can sign off on a lease, your future landlord or the property management company is going to want proof that you’ll be able to cover the rent. Aside from asking about your income and rental history, they’ll also want to take a look at your credit.
In general, a good credit score can make it easier to get approved for a new lease. A bad credit score, on the other hand, could leave you out in the cold. If you’re shopping around for a new place to call home, read through our quick guide to leasing and credit scores so you know what to expect.
Credit Scores Explained
In the simplest terms, a credit score is a three-digit number that measures how responsible you are when it comes to using and managing credit. What makes up your credit score, how it’s calculated and just how many scores you have is where things get a bit more complicated.
There are two primary scoring models that lenders and landlords can use to gauge your creditworthiness: FICO scores and VantageScores. More than 90 percent of major lenders rely on FICO scores for credit decisions. As of 2016, 20 of the top 25 U.S. financial institutions also used VantageScores for credit approval.
FICO score basics
FICO scores were first developed by the Fair Isaac Corporation in the 1950s. These scores are more or less the benchmark for credit scoring. FICO scores range from 300 to 850 and the higher you land on the scale, the better.
In terms of what goes into your FICO score, we don’t have the exact formula that’s used to calculate them. We do know, however, that there are five key factors that influence your score. This table highlights what those factors are:
FICO Credit Score Factors and Their Percentages
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.|
Out of the five, your payment history is the most significant. Paying your bills on time every month can strengthen your score. Lenders want to see that you’re able to cover your financial obligations. Paying late, on the other hand, can send your score into a downward spiral.
Once you’re 30 days late on a credit card or loan, your creditor can report that to the credit bureaus. Equifax, Experian and TransUnion are the most well-known credit reporting agencies. The information that’s in your report--including your payment history--is what influences your credit score. You have three different credit reports, one from each bureau, and each report generates its own FICO score.
Late payments can knock as much as 100 points off your score. Even worse, a negative mark caused by a late payment can stay on your credit history for seven years. If you’re trying to lease an apartment, your landlord might question whether you can be counted on to pay your rent on time if you’ve paid other bills late in the past.
The takeaway? If you want a better credit score, make paying your bills on time a priority. That includes your monthly rent payments. Setting up automatic payments or bill payment alerts through your bank’s mobile banking app can help you keep tabs on your due dates.
How VantageScores work
The VantageScore model is a newer credit scoring option. It was developed jointly by the three credit bureaus mentioned earlier. Like FICO scores, the VantageScore 3.0 ranges from 300 to 850 and the higher your score, the better.
As far as what goes into a VantageScore, the factors are similar to the ones FICO uses. They include:
- Payment history
- The age and types of credit you’re using
- How much of your total credit line you’re using
- Your total debt balances
- Inquiries for new credit
- Your available credit
Once again, we don’t know exactly how each of these factors is weighted to calculate your VantageScore. In case you’re wondering, none of the following things has any impact on your FICO or VantageScores at all:
- Your age
- Race and color
- Marital status
- Salary and occupation
- Employment history
- Your total assets
Keep in mind that if you’re applying for a lease, your landlord may ask you where you work or how much money you make as part of the initial screening. Generally, landlords are looking for tenants whose income is 2.5 to 3 times the monthly rent. If you don’t make the cut, however, having some cash set aside in savings could sway the landlord in your favor.
How Leasing Affects Your Credit
Leasing an apartment isn’t the same as applying for a credit card. That doesn’t mean, however, that it has no impact on your credit score.
When you apply for a lease, your landlord is likely to do a credit check. If they opt to do a hard pull of your credit, that can impact your score. A hard pull means that the lender has viewed at least one of your credit reports. This is different from a soft pull, which applies when you check your own credit.
Hard pulls, also known as inquiries, can shave up to five points off your score at a time. That’s not a huge drop but if you’re shopping around for a lease and applying for multiple apartments, those lost points can add up pretty quickly.
Inquiries can stay on your credit report for two years. Doing your homework on which apartment is going to work best can help you keep those hard pull inquiries to a minimum.
Can leasing help you build credit?
By itself, leasing an apartment doesn’t necessarily help your credit score. That’s because FICO scores don’t include rental payment history. You can, however, potentially using your lease to boost your VantageScore.
There are several companies that report rental data to the various credit bureaus, such as Rent Track, Rental Kharma and Rent Reporters. The credit bureau these companies report to can then include your payment history into your VantageScore calculation. If you’re paying your rent on time, that could help your VantageScore.
The catch is that your landlord has to report your payments for you. You generally can’t self-report your rental history. If your landlord doesn’t agree to opt in to the rent reporting service, then you won’t get credit for your leasing activity.
You should also take note that these companies typically charge an upfront or monthly fee for these services. You’ll have to weigh the cost against any credit score benefit you anticipate from reporting rental payments.
Using a credit card to pay rent
If your landlord doesn’t want to jump on the rent reporting bandwagon, there’s a backdoor way to use rent to build your credit. It’s relatively simple. You use a credit card to pay your rent each month. Then, you pay the credit card charges in full.
This way, you’re establishing a positive payment history and you’re avoiding paying interest on what you charged. This can be a good option if your landlord is open to accepting your rent via credit card and you’re responsible about paying the bill off each month. Just be mindful of any processing fees the landlord may charge to accept your rent payments.
Read the fine print before co-signing a lease
While leasing isn’t guaranteed to help your credit score, it can destroy it if you’re co-signing with someone else. If you co-sign with a roommate and they don’t cough up their share of the rent, the landlord could decide to sue for the balance owed. If they win their case, the judgment can show up on your credit report.
Once a judgment ends up on your credit, it can stay there for seven years. This kind of blemish can be extremely damaging to your credit. If you want to buy a home at some point, apply for a new credit card or consolidate student loans, a judgment could stand in the way of getting approved.
If you’re planning on renting a place with a friend, family member or significant other, consider asking the landlord if you can have individual leases instead of signing one together. That way, you and your credit score have some insulation if your roomie ends up skipping out on the rent.
Check Your Credit Report Before Applying for a Lease
The best way to avoid any surprises when you’re trying to lease a place is to know what’s on your credit report before the lender sees it. Federal law allows you to get one copy of your report from Equifax, Experian and TransUnion each year.
When you get your reports, take the time to check all of the information carefully. Look for any errors or inaccuracies and make sure your personal information is up to do date. It’s also a good idea to check your credit reports regularly for signs of fraud, such as accounts that you don’t recognize. Periodic credit checks can help head off problems that could lead to major financial complications.