How to Rent Apartment with Bad Credit – Maybe someone has told you that trying to rent apartment with bad credit is a waste of effort, but that’s not necessarily the case.
It’s true that bad credit can result in a denial of the application.
Not all landlords will automatically reject you as other factors are taken into consideration.
Such as your salary and previous rental records, if any.
Rent Apartment with Bad Credit ~ Why Do Landlords Check Your Credit?
Landlords check your credit score (How Credit Reporting Agencies Work) because they’re looking for evidence that you are predictable, consistent and stable.
For these reasons, it’s very important you learn how to have a good credit score.
You prove your consistency by doing the same thing over and over, so if your credit score shows that you’ve had late payments, then it isn’t going to build confidence and can make them doubt your ability to handle the financial obligations.
Landlords determine stability in different ways, including the number of years you’ve been working for a company, how long you have had a job, your payment history, the number of accounts you have and so on.
If you’ve been working with the same company for a long time and have had no problems there, it’s a sign that you’re stable and can be relied upon.
Given these facts, it’s easy to understand why landlords want to check your credit score.
That being said, there are a lot of strategies you can use to overcome this problem.
Strategies to Get Your Rental Application Approved
The first thing you need to do is check your credit score and figure out what’s wrong with it.
Is it really as bad as you think it is?
Read the score before you go hunting for an apartment so you’ll know what you’re dealing with.
Since your landlord is going to review the information there anyway, you might as well check the credit score.
If there’s any inaccuracy, now is the time to settle that dispute, rectify those mistakes and improve your credit score.
Rental Application Approved Hacks
If you don’t want to deal with credit score issues at all, then look for a landlord that doesn’t check credit scores.
Usually, apartment complexes are run by large, complex management companies and demand a credit check.
So you’re better off renting apartments operated by individual landlords that don’t check credit or who are willing to take a chance on tenants that don’t have a solid credit history but has a steady income.
Check online classifieds for individual landlords: online classifieds is one of the best places to find apartments run by individual landlords rather than by large companies.
Just go to the housing section in the classified ads where there are townhouses, condos, apartments and houses and make sure you look in your area.
There used to be a time when only companies were listed there, but that’s no longer the case as individual landlords are now listed online regularly.
While you’re looking for locally available apartments for rent, inquire from the landlord about the criteria used to approve a tenant’s application.
Knowing what to ask a landlord is important so make sure you know what to do.
Your chances of being approved go down if you have unpaid balances to utility companies or landlords, so pay those debts now and ask the company to write a letter indicating that your debts are now fully paid.
Write a letter to your prospective landlord explaining why you had financial problems in the past, be it medical bills, divorce, job loss etc.
However, make sure that your letter points out that you are now financially settled and capable of making payments.
If you have a steady source of income now, chances are the landlord will overlook a bad credit score.
If your income is three to four times the required rent then you’re in good position, but you do need to present evidence of your income such as two months’ pay stubs.
That ought to be enough to convince the landlord to take a chance on you.
You may also consider getting someone to cosign the lease agreement, but make sure the co-signer has a good credit standing.
Just remember that if you get evicted or skip on the rent payment for whatever reason, the landlord has a legal right to go after the co-signer as well.
Pay more upfront
even if you do get approved with a poor credit score, you’re likely going to be asked to pay a higher security deposit or anywhere from one to three months in advance.
If you don’t have a good credit score and plan on renting an apartment soon, save money now since you’re going to need it for the advance payment.
What if I Have No Credit?
Having a good credit history helps in renting an apartment, but what if you don’t have any credit at all?
Suppose you’ve just graduated from college and haven’t established any credit history?
Your situation is actually a bit simpler compared to those who have a poor credit score, but your approach will be similar to them in many ways.
Rent an Apartment With No Credit Hacks
Look for an Individual Apartment Owner:
As has been pointed out earlier, individual owners are receptive to these situations and allow people with no credit to rent their property.
What’s important is that you prove that you have a steady source of income.
If you can prove this then your chances of getting approved will be high, and in fact it’s probably going to be a lot higher than those with bad credit.
Offer to Move in Immediately:
An empty apartment takes its toll on landlords because they have to shoulder the utilities and mortgage without getting compensation because nobody’s renting.
If the apartment is empty and the demand for renters is low in that area, you’re likely to get approved if you offer to move in quickly.
In short, look for apartments in places where there’s little demand.
Show Your Savings Balance:
Even if you don’t have a credit history, you could get approved if you can show the landlord your savings is more than sufficient to pay the rent.
Balancing your finances will be much easier if you keep the rent expenses to a maximum of 1/3 of your monthly income.
So if you’re bringing in $3,000, look for apartments with a monthly rent of no more than $1,000.
If you don’t have a stable job yet, try to convince the landlord by showing him your savings account.
The amount that will be needed to “impress” the landlord depends on how much the monthly rent is and on other requirements.
To be safe though, your savings have to be such that you can pay several months of rent.
If you can afford it, you should pay a few months’ worth of security deposit, around two to four months will be nice.
This will provide some assurance to the landlord that you’re not going to run off for the next few months.
Second, it increases your credibility and demonstrates that you’re willing to pay.
Make certain that your payment is properly documented so there won’t be any misunderstandings later.
If you’re going to rent the place for a while, keep copies of all the payments you make as well as other documents so if there are issues later on you’ll have the papers to back you up.
There are other ways to boost your credibility even if you don’t have any credit history.
One of the best ways to do this is to show your would-be landlord that you have a solid reputation with your previous landlords and business associates and employers.
While landlords can be strict with requirements, most of them will be happy to give you a chance if you show them that you have a good reputation at school or work.
If your employers or former teachers say that you are of good character then it’s going to help convince the landlord that you’re responsible with money and can be trusted.
Your character reference can be as important as your financial standing so don’t discount that element.
You can also talk to the landlord and offer to go on a short lease or start month to month.
Usually it takes landlords several months to complete an eviction of a tenant who doesn’t pay.
If you offer to sign up for just three months or month to month, you give the landlord the option not to renew you if you don’t meet the required standards.
Even if you know that you have the capability to pay the rent every night, this approach will give him more flexibility, and it also demonstrates your willingness to be flexible.
For many, the idea of trying to rent apartment with bad credit seems impossible, but really it’s not, provided you have the know-how.
Even if you have bad credit or no credit at all, just following the tips given above will increase your chances of having your application approved.
How Credit Reporting Agencies Work
The business of lending money entails a lot of risks hence the importance of the Credit Reporting Agencies.
Financial institutions like banks and insurance companies take a lot of risk in lending to people for various purposes like acquisition of homes and vehicles, or payment of their children’s tuition.
These companies try to minimize the risks of extending loans by looking at the credit history of their prospective clients.
Borrowers who have been found to have a good credit history are usually given low interest rates, while those with a poor credit history are subjected to high interest rates, if they get approved at all.
But how do financial institutions know about the credit history of a borrower?
They approach credit reporting agencies, also called credit bureaus.
These are companies that compile and maintain the credit history of all citizens in the country.
If you have a credit card or have taken out a loan from any financial institution, then you have your credit history.
Credit reporting agencies collect and maintain the credit history of a borrower by gathering all your activity or involvement with financial institutions like banks, mortgage firms and credit card companies.
These firms then create a comprehensive credit report which is the basis of a person’s credit score, a three-digit grade that can affect your financial plans.
Fair Credit Reporting
In the past, the credit history and credit score of borrowers were revealed only to financial institutions such as banks and credit card companies.
Consumers back then had absolutely no idea of what their credit history and score was, and how these bits of information affect their financial viabilities.
Everything changed in the 70’s with the enactment of the Fair Credit Reporting Act.
This law basically gave U.S. citizens the freedom to ask for a copy of their credit reports for free, and to receive a copy of the report with adverse findings if they are denied of a loan.
Under the same law, you can also report errors on your credit report and have the credit bureau respond to your complaints in 30 days.
If it is proven that there are indeed errors in your credit history, the credit bureau is required to correct these issues within 30 days.
On the other hand, if all the information on your credit history is correct and you have adverse credit findings.
This information will be removed from your credit history after seven years.
The Fair Credit Reporting Act is one of the many laws passed during the 70s that protected and promoted the rights of consumers.
Other laws that were also passed during that time include the Truth in Lending Act.
The Truth in Lending Act basically shields you from unfair and untruthful billing processes employed by banks and other financial institutions.
The Big Three Credit Reporting Agencies and Credit Bureaus
Collectively, they are referred to as the Big Three. The 3 credit bureaus, however, are not the only credit reporting agencies in the United States.
There are also other smaller and industry-specific agencies that provide credit reports and similar risk management services.
The 3 credit bureaus are the most popular since they dominate the consumer credit information industry.
For example, Experian has credit information of at least 66 per cent of the total U.S. population.
This gives you an idea of how big the operation of the Big Three is.
The Big Three have two basic services.
They gather and process credit information of all U.S. consumers.
In gathering credit information, these companies receive monthly consumer credit information from all lending institutions in the U.S.
The information may pertain to the total debt of individual consumers and their repayment history.
Information like your monthly income and contact details are also sent to the credit bureaus.
Similarly, the Big Three also gather public records on financial information like court records regarding bankruptcies.
Thanks to the Fair Credit Reporting Act, you can get all of these pieces of information by requesting for a copy of your credit history from any of the Big Three credit bureaus.
Your request for information is called a soft inquiry, which pertains to all requests by consumers and employers.
Hard inquiry, on the other hand, pertains to requests by financial institutions.
The Big Three are independent from each other, and thus collect information on your credit history in different ways.
So a credit report from Experian is very different from one issued by TransUnion, in the same way that its report will differ slightly from the report of Equifax.
Also not all lending institutions report to these credit bureaus which lead to more discrepancies.
Credit bureaus don’t just gather information about your credit history.
These companies also process the details to come up with the credit score, a three-digit grade that can affect your ability to avail of the loan.
The credit score ranges from a low of 300 to a high of 850.
Basically, a low credit score prevents you from getting a loan, or subjects you to high interest rates.
On the other hand, a high credit score gives you benefits most remarkably low interest rates.
If you have a high credit score, you can apply for a housing loan or auto loan and pay lower amortizations compared to another consumer with a low credit score.
Think of a credit score as your grade in school.
Credit rating agencies look into different variables in coming up with the credit score.
These variables include your payment history, outstanding debt, length of time you have been part of the credit system, and your new credit.
Your payment history comprises the biggest bulk of your credit score at 35 per cent.
Creditors would want to know your track record in paying off your loan obligations.
If you are habitually late in paying your bills, or if you have bankruptcies before, then you can expect to have a very low score in your payment history.
In turn, your credit score suffers.
The next component that credit bureaus look at in computing your credit score is your outstanding debt.
The total amount that you owe all your creditors will be considered here by the credit bureau.
Other components in calculating credit score include the length of time that you have been part of the credit system (15 per cent).
Your new credit (10 per cent) and the types of credit that have been extended to you (10 per cent).
How Credit Score Affects You
The credit score computed and reported by credit bureaus can have a huge impact on your life.
Your plans like purchasing your own house or getting a new car may be derailed if you have a poor credit score.
Banks and other financial institutions may still give you a car loan or a home acquisition loan, but chances are high that you’ll be subjected to high interest rates.
To cite an example, say you are applying for a vehicle loan. If your credit score is within 500 to 589 range, then a bank may give you an 18 per cent interest rate for 36 months.
But if you have a credit score of 700 to 850, the interest rates may go as low as six per cent.
Of course, there are other factors that may affect interest rates aside from your credit loan.
These factors include your equity, the type of property that you are acquiring, and so on.
How to Improve My Credit Score at Credit Reporting Agencies
Now that you have learned how your credit score affects your quality of life, then you should also be aware of ways to improve your credit score.
Financial advisers have many tips on improving credit score such as reviewing your credit history and correcting any errors.
Studies have shown than 1 out of four U.S. consumers have incorrect information on their credit history, affecting their credit score in the process.
You should also limit your use of credit cards.
Keep your total credit to 75 per cent or less of your total credit limit.
If you can keep it to as low as 25 per cent, then the better. You must also make it a habit to pay your bills on time.
As mentioned earlier, payment history comprises 35 percent of your credit score.
Prompt payment of your credit card bills will improve your payment history and positively affect your credit score.
Generally speaking, frequent inquiries on your credit report can negatively affect your credit score.
So don’t inquire on your credit report unless you really need to.
If you are interested in applying for a loan, it would be best to make multiple inquiries with banks first before requesting for your credit report.
This way you can limit the inquiries on your credit history.
The bottom line is that Credit Reporting Agencies and credit bureaus have a significant impact on your life.
So make sure that you are aware of your credit history and more importantly, if you have a less than stellar credit rating, you should learn the different ways to improve your credit score.
What is a Credit Score?
You’ve probably never heard people talking about their credit scores to others.
Just like a social security number, your credit score is one of your most important metrics.
A good score opens more financial options for you.
Your credit score is a measurement of your financial capacity to pay off a loan.
Lenders from banks, credit card companies and even government agencies use this score to determine how credit-worthy someone is before they award someone credit.
This score is reported in the form of a number between 300 and 800.
The higher the score, the better the status. Ideally, everyone would want a high score.
That is found in between 700 and 850.
If your score falls in this range, that means you present a low risk for creditors because of your good payment history and high creditworthiness.
If your score falls below 600, that means you’re a high risk.
But this wasn’t always the case a long time ago.
Before the inception of this system, lenders and banks in the 1980’s had to rely on their experiences in the industry to judge if lending a particular consumer money was good enough for it.
This caused a myriad of problems that stemmed from human error.
Standardizing credit scores
When the time came that the losses in the industry were too high due to failure of payments, an organized system was constructed in order to protect lenders and provide consumers with an accurate idea of where they stand in terms of credibility.
While it may seem demeaning to compare people to a mere number, this system has allowed both lenders and borrowers to review their chances before they make a financial decision.
Creditors have the chance to screen applicants.
Consumers have the chance to improve their score using the system.
As of today, many countries use this standardized system to review their applicants.
The United States, the United Kingdom and Japan use this system.
However, your credit score doesn’t just affect your chances of getting a loan or credit.
This score is also used to determine a suitable interest rates for loans.
If you have a good enough credit score, lower interest rates are afforded for you because of your standing.
If your credit score is low, you will have trouble getting approved for a loan.
You’ll also be given higher interest rate so you’ll be “encouraged” to immediately settle your balances.
It’s essential to keep track of your score.
But doing so isn’t as easy as always paying your loans on time.
It pays to understand where your score comes from and what factors affect its growth or declines.
And the first place to look for answers is at your credit report.
What is a Credit Report?
Your credit report is a compilation of all things related to your financial background.
It also includes basic personal identifying information about yourself.
When a creditor needs to obtain someone’s score, they contact organizations known as credit bureaus or credit reporting agencies.
These agencies then pull up your records to determine your score.
Therefore, it is important to understand your credit score is a separate entity from your credit report.
While a credit report is a collection of your history and actions with money, your credit score is merely an interpretation of this history illustrated in the form of a numerical value.
In line with that, creditors may use just your credit score. Or they may use both your score and your report to assess if you qualify for a loan.
It depends on their screening process.
Equifax, TransUnion, Experian
The various financial institutions you use do business with these organizations to help protect them from poor lending habits.
In the United States, there are three Credit Reporting organizations that sculpted their business model on credit scores.
Banks, lending institutions and other creditors do business with these agencies via requests of credit scores.
As a consumer, you also have access to these reports.
They are also up for contention if you feel that something is amiss with the way your data is treated.
Part of the things that make up your credit report is a record of all your loans, mortgages and payments.
These details will also include which balances were settled on time and which ones came overdue.
These overdue balances are even segregated based on how long they’ve been overdue until the moment that they have been absolved or settled.
Keeping good payment records
When you’re able to keep a good payment record on your loans and balances over a long period of time, that contributes positively to your score.
That means you’re punctual with your payments and plenty of creditors would love to give you more loans and credits for you to use.
Apart from your actions, your age in the financial industry is also accounted for in your credit report.
It would be unfair if all consumers were graded on the same bases.
That would mean a fresh, new borrower would be the same as an excellent borrower who has worked hard to maintain their good credit score.
This is why credit reporting agencies compare scores of people who share the same length of financial history.
You are graded in comparison to how well other people have fared who are just as “financially young” as you are.
On the other hand, if you have a poor payment history, creditors will see you as a liability that might cost them more money than they invested in you in the first place.
This is especially true if you’ve had any balances that have gone into collections.
When a loan comes into collections that means your payments have become so overdue that your creditor has resolved invest more money in a collection service agency to recover the debt you’ve made from them.
Have you ever been pestered over the phone by agents reminding you about your balances, those are collections agents who are called when you’ve gone long overdue.
And when a collections agency becomes involved, rest assured that your overdue payments have also been reported to the credit reporting agencies, severely pulling your score down.
Depending on the places where you do business, your actions may end up getting reported or not to the various credit score agencies.
Some companies or banks choose not to report petty late payments or unpaid fees that you might have forgotten.
On the other hand, there are also companies that make it a point to be as transparent as possible, reporting every single payment you’ve made, whether it’s on time or late by a day.
This is why phone, internet and even cable TV subscribers always ask about their service provider’s credit reporting habits before signing up with them.
Creditors use these as risk factors in order to see if you have a history of missing your payments or if you have erratic spending habits.
Ideally, you would want to present yourself as someone who isn’t a high risk.
That would mean creditors can entrust you with higher credit and more benefits.
What are Credit Scores Used For and Why are Credit Scores Important?
Fortunately, the answer to both of these questions are the same.
Credit Scores are important exactly because of what they’re used for.
Primarily, Credit scores are used to approve loans such as mortgages and car loans.
As mentioned earlier, you can also get these loans at lower rates if you show yourself to be a low risk with a high credit score.
If you have a good enough score, the loan is given to you.
When you don’t, you might end up being advised as to how to improve your score in order to get the loan approved.
If in the case that your initial application did not pull through, going to a different lender or company isn’t going to be any easy nor will your chances improve.
This is because your score stays with you wherever you go.
That means the next creditor will be looking at the same score even if they’re in a different state or locality.
You scores are also used for various services that require monthly payments like phone lines, cable TV services and internet services as well.
Service providers also do business with credit reporting agencies before approving these applications.
But credit scores aren’t just used for loans and subscriptions.
Apartment rentals and even job applications sometimes require a review of your credit score.
And in these cases, having a good score can actually save your life.
This is because you’ll never know when you’ll be needing a loan. Emergencies can happen at any time.
If you’re short on finances, a good credit score can make it easy for you to obtain loans or apply for jobs when you need them the most.
On top of that, today’s economy is growing into a credit-based environment.
People are now carrying cards in their wallets instead of actual money.
Everyone’s wealth is now going into banks where their money is safe.
People are now buying appliances, vacations and even houses with credit cards instead of bank transfers.
There’s a lot you can’t do without a credit card or a good credit score.
Credit cards are starting to become the foremost choice when it comes to making payments.
They’re used in almost every establishment.
From your local coffee shop to the grocery store, people are now paying through their credit cards which give them benefits and bonuses as compared to paying with cash.
And with a bad credit score, you’re missing out.
Even professionals are beginning to carry portable card readers to help make their business more accessible to their consumers.
Finally, the most important thing you have to remember about your credit score is that it takes time to repair.
If in the case you have a low score or you’ve been hit by a severe negative action, it could take you at least five years to repair the damage that’s been done to your credit score.
So you may be looking at years of rejected loan applications before you can apply for another one.
And if it’s hard to improve on a score, it’s unfortunately easy to ruin one as well.
A few months of overdue payments are more than enough to negatively impact your score and pull it down by several hundreds.
And when this happens, you might have to work on this setback for a few years to get your score back up.
What is My Credit Score and What is Good Credit Score?
You will almost always want to ask for your FICO score.
Although it sounds like an acronym, FICO is the name of a company that deals in a concept known as “predictive analytics”.
This is an approach that takes your current financial data and computes what your future financial actions will likely be in the future.
Your FICO score is probably the most important reading you’ll get as far as credit scores go.
This is because more than 85% of American businesses and banks deal with FICO scores more than any other type of credit score.
It is important to remember that although FICO gives credit scores, it is not a credit reporting agency.
It’s a separate business entity that provides other financial services to its clients.
Obtaining your credit score
You can request a copy of your score from them as well, but it will come at a price.
In fact, the most direct approach would be to contact these credit reporting agencies and request for your scores yourself.
Of course, this will come at a price.
You might also have to surrender your credit card information to these agencies so that they can pull up your data.
But there are more affordable solutions as of today.
Instead of going to the agencies directly, some credit card companies afford their card owners regular credit score reports as part of their memberships.
You can ask for this before signing up with a credit card company.
There are also online subscriptions to websites that offer free reporting for their members as well.
Another efficient and affordable way to check your scores is to go online.
There are several internet sites that will allow you to request your scores for free.
Some of these places are Credit Sesame, Quizle and Credit Karma.
When you get your credit score, you’ll be given three ratings.
Each of these ratings comes from the each of the different credit reporting agencies.
Different credit scores from different agencies
The first thing you will notice is that these your score from each is different from the other.
This is nothing to be worried about, though.
Remember that each agency uses different measures to check your creditworthiness.
But in the case that the difference is very large, this might mean that one score might not have been updated as of the moment.
You would need to contact the credit reporting agency to have them update your scores.
The first thing you want to look at is the three digit number that represents your rating.
As mentioned earlier, the higher the number, the better.
And depending on where you get your report, you might find different values with little variations among each other.
This is because different reporting agencies and sites use different computation methods to translate the data from your credit reports into your credit score.
Depending on where you get your score, it will also come with comprehensive data about your credit report and other notable things that have contributed to the score that you’re seeing.
You could have gone down several points because of a balance that went into collections.
You could have pulled up a few points because of that payment you sent in early.
Some scores and reports could pull these details to give you a better picture of your score.
If in the case that your score is low, the next best thing to do is to look at your own finances.
Have all your balances been paid off?
Were all your payments on time?
Did you change your buying behaviours?
These things could have caused a negative change in your score.
And if you think that there’s a problem, you can contact your creditor and have them correct the error or investigate.
Why You Need to Check Your Scores Regularly?
Unlike exams that you only take once, your Credit score is an ever-changing measure of your creditworthiness that is affected by all your financial actions.
With that in mind, monitoring it on a regular basis only makes common sense.
The first thing you accomplish by checking your credit score regularly is an update on your progress.
You’ll know if your actions have improved your score or if they’ve pulled you down.
You may also detect abnormalities within your score that could have been brought about by fraudulent activities.
Other people could have been using your name to apply for loans you’ve never authorized.
People could be taking out a mortgage with your credentials without you even knowing it.
And looking at your credit score on a regular basis will help you catch anything out of the ordinary.
Errors in credit scores
You can also find errors in some reports that might have been made on your account.
A machine error from your bank might still show on your report, causing a dent in your score.
You can find these anomalies and have them corrected if you check your score regularly.
You can also check to see if your scores are regularly updated by the different credit reporting companies by regularly checking your credit score.
By checking your score, you’ll also become accustomed to what actions help you and what actions don’t.
Seeing your raw score is a good way to recall your actions during the past period that might have put a dent on your score.
In addition to that, it’s always a wise option to know where you stand.
You will be able to approach lenders with confidence if you’re already aware of your score and its contents even before anyone requests to have it pulled up.
On the other hand, you’ll also become aware that you need to start working on a low score long before you need to apply for any loans or credits.
It’s always good to be prepared and informed.
But you have to be careful about how regularly you check your scores.
This isn’t some simple statistic that you could pull up every week without consequence.
You can potentially hurt your score by requesting for it too often.
The ideal time frame on which to do that is every 365 days.
This is the ideal period of time long enough for you to see visible improvements in your score.
It is also short enough for you to quickly detect anything that’s harming your score before it does any more damage.
Credit reports show responsibility
In totality, your credit report is your representative to the financial world.
You can have a million dollars in your bank account but have a terrible credit score.
This could be because of all the bill payments you’ve missed.
Your credit score is not a measure of wealth.
It measures the skill in handling the responsibility of credit that has been afforded to you by your creditors.
And if you can take good care of your credit score today, your credit score will take good care of you tomorrow.
How to Improve My Credit Score
If I improve my credit rating, I get approval with the best interest rates for housing loans, car loans and study loans.
Here is how credit ratings are computed and how they work for your advantage.
You want approval for credit and the best rates for the most significant loans you may need.
Everyone has heard the terms “debit” and “credit” before.
Your financial stability is based on a Credit Rating.
Even if you have over a million dollars in the bank, you need to be able to demonstrate credit worthiness.
You do this by using credit options and pay them when due.
This helps you to establish credit and improve your credit rating.
Yes, it’s important for a person to have the means to pay their obligations.
However, it’s equally important to show he/she is in the habit of paying them.
It’s about establishing a character or an image of credit worthiness.
What a lending company wants to know
On the part of the lending company, it all boils down to three questions:
- Should I extend credit to this applicant?
- What does his credit history show?
- How did he pay his previous debts?
Now, you may think that loans and credits only concern those who are lacking in funds.
However, you will see this is everyone’s concern.
It may be even more important for those who have money.
Why should I improve my credit score
Everyone stands to benefit from the financial flexibility which a credit line can provide.
It allows people to invest on assets that they cannot afford.
Examples of who needs credit:
Take the example of the family’s bread winner who can generate two sources of income by having the mobility to jump from one job to another with the convenience of an auto loan.
Perhaps there is a family who will eventually save on rent when they finish the mortgages on their newly acquired property.
Through student loans, a young rank and file employee can improve his chances for attaining supervisory and managerial status or a blue collar worker can improve on his employment options.
For small bakery businesses, a credit line can be a means to purchase a bigger oven that can satisfy the increasing demand.
For a mega business venture, it could be used for the construction of a gigantic mall that could satisfy the needs of a growing community.
Reasons to improve credit ratings
There are basically two important reasons why you everyone should improve their credit score.
Your credit rating will determine the loans that you will qualify for.
Your credit rating determines the interest rates you will need to pay.
The credit score or credit rating is a three-digit number that helps lenders predict how likely you are going to repay a loan and make those payments on time.
The credit score was formulated by Fair Isaac and Company.
During the initial stages of its application, they decided it would create more confusion to explain how it worked to the public.
Therefore, they kept the formula and its components exclusive to lenders.
However, due to pressure from U.S. Congress, private industry and consumer groups that started in 2001, everyone can now view their credit rating for a fee from credit monitoring and reporting agencies.
The credit rating is a three-digit number that ranges from 300 points to 850 points.
How a credit score is determined
Lack of funds, negligence and absolute refusal to pay are not the only factors that will cause overdue payments.
A person can simply forget about an installment payment.
You may get confused with the dates.
A person who can show that he’s had a lot of experience with various types of loans may be less of a risk in terms of default.
The majority of your score is made up of two things:
35% of the score is acquired from your payment history
This will show a lender if you are paying your loans promptly.
It shows how many times you were late in your payments.
It shows how many of your loans had to be sent out for collection, and if you filed for any cases of bankruptcies to be saved from collection and litigation.
The most recent of these incidents will work worse for your overall score.
This is obviously very important for lenders because, as a business entity, they want only to extend loans to those you are most likely to pay them.
30% is based on your outstanding debt
All credit lines have limits.
The agency checks on all of your available credit lines and if they are maxed out.
The more credit lines you have which are fully extended to the limit, the lower your score will be.
This tells if a person is living beyond his means.
A person who keeps on getting credit lines and exhausting its limits is bound to reach a point where all his income won’t be able to pay for the monthly minimum fees for the lines and will eventually file for bankruptcy.
Also very important that impacts your credit score
15% of the credit score is based on the length of time you’ve had credit
The longer you’ve had a credit line, the better for your overall rating.
This factor is very important because it describes your habit.
As this stretches for a longer period of time, it defines your character as a borrower.
Long years of statistics will give lenders a more accurate picture of how you are as a borrower and more importantly as a payer.
10% is affected by new credit lines that you have opened
If you have recently opened a credit account, it will have a negative impact on your credit score.
A credit line is based on your paying capacity.
It is supposed to be a representation of the maximum amount of debt that you can pay with your current income.
Imagine you have been recently approved by another lender for a credit line.
Then you apply for another one.
There is concern you might exhaust your credit line on both accounts.
Then, you would end up with a debt that is double than what you can actually pay.
10% is based on the types of credit accounts that you have
This speaks of your financial management abilities.
It would be very good to have several types of loans.
You can have both revolving credit loans and installment loans.
Being up to date with several loans with several due dates will show how mindful you are on your obligations.
It speaks of your financial discipline, experience and organizational skills.
It demonstrates you can mix and meet your financial obligations.
Improve My Credit Score
It is wrong to conclude the best way to improve your credit is to stop using credit cards.
If you refrain from using your credit cards after their approval, you are not providing good info about your creditworthiness.
You are providing zero-basis.
This will discourage lending companies from approving major loan applications even if you can show proof of paying capability.
Improving your credit information simply means using your credit card for purchases you manage to completely pay off when they fall due.
Or, allocate the purchases to installment credit if they need be and pay the installments as they fall due.
Credit card companies and commercial establishments will lure you into purchasing luxury items on credit.
Remember, credit cards should be reserved for items you purchase for investment.
This will bring forth the opportunity for more earnings.
Try to maintain a good credit score for those more important investments.
These include a car, house or student loans.
These will can be significant improvements in your life.
The worst situation is when you rely on credit for the essential basics of daily life.
If you pay the credit cards each month on time, it’s fine. Then you are using the credit cards as a convenience.
However, when you need them when you don’t have the money — for gas and groceries — then you are using them out of necessity and not by choice.
How to Eliminate Debt
If this information about getting a good rating has reached you at a stage where you have fully exhausted all your credit cards and would want to remedy the situation to get a good credit score for a major loan, you have to start over by getting your balances to zero.
You have to eliminate your debt.
4 Hacks to Get out of Debt
Fix one credit card at a time
Pay the minimum amount due on all other cards.
Focus on putting all your money on one credit card at one financial institution to get it back to zero balance.
When this is done, you can work on another credit card.
Follow the same procedure for the rest until all cards have a clean slate.
Ask for lower rates
It seems credit cards are standardized and formal.
Yet, you are actually dealing with a person.
You can call and ask for lower credit interest rates.
With lower interest rates, you will be able to pay a larger portion of the entire balance.
The lower the interest rates, the faster you can pay down the balance.
Transfer your balance
Another good strategy is transferring all balances to the credit line which has the lowest interest rate.
The logic follows the same principle or could be the next wise step after you have done option number 2.
But, this will only work if the lowest charging interest card’s line is not fully exhausted and can accommodate more.
It would be a perfect scenario when the lowest charging credit card has just been approved and has a clear balance.
This will be a rare stroke of chance and you should avail of this advantage.
Make two minimum payments a month
Avoid being stuck in monthly cycles of interest-only payments.
Instead, try paying the minimum payment twice a month.
The first payment you make would have paid for the interest charges.
This will probably be just a small slice on the total balance.
The next minimum payment you will make after two weeks will be eliminated from your balance.
This will reduce it considerably.
You will notice as you apply this principle, your monthly minimum payments will reduce.
This will eventually give you the capability to pay minimum payments on a weekly basis.
This will take your total balance to zero faster.
It’s hard to eliminate all debts because you have to pay for current needs and past purchases.
You may need to put off your yearly family vacation and other luxuries.
It is hard but it will make you cautious as to what purchases to buy on credit.
Ways to build my credit
For a fee, you can get your actual credit rating.
You can get a free credit report as well.
What do these scores mean?
With a score ranging between 300 to 580 points, there is minimal chance for approval.
Your loan application has a 100% chance to be denied.
For scores anywhere between 581 and 650, you’ll have a chance for approval.
However, this will be for the highest rates.
With a credit rating in the range of 651 to 710, you’ll qualify for credit at moderate interest rates.
If your credit score is from 711 to 750, you’ll qualify for credit at competitive rates.
With a credit rating of 751 or higher, you’ll get the lowest rates in the market.
Immediate steps to build credit
Apply for credit lines even if you don’t foresee a need for it.
If you are planning to apply for a major loan, say a housing loan, in five years’ time, you need to start using smaller types of commercial banking lines, like credit cards, so lending companies will have a record to inspect.
Even if you have a stable high paying job, a lending company has to see your credit and paying habits.
Then they can have confidence to approve your loans.
It’s not enough to show that you have the ability to pay the installments.
They have to see you have it in your character to actually make the payments when they fall due.
Open at least three credit accounts
One credit line has something to say about you and more credit lines will have more accounts vouching for your credit worthiness.
Having multiple credit accounts in good standing with good track records will work for your rating.
A new one will be an open book that has nothing to tell.
This uncertainty will pull down everything positive your other accounts will tell about you.
If you want a good credit rating for any major loan that you have to make, refrain from opening a new credit account up to two years before you are planning to apply for that major loan.
Keep your credit usage to all accounts at a maximum of 25%
If your credit limit is up to $5,000, maintain nothing more than a $1,500 balance.
Never go beyond this.
This will show lending companies your financial status is not stretched to the limit.
Remember, the credit ceiling given to the individual is based on the paying capacity of that individual.
All lending companies want to maximize on their clients’ business through manageable credit.
If you use all your credit lines to the limit then, you are hovering within the fine line between being financially capable of meeting your debts and starting to have overdues.
Another credit line will likely tip you over to the delinquency list.
Make your due dates
Whenever you make purchases on your credit card, you are expected to pay for these items on the maximum 45 day float.
For all purchases you make during a given month for the 1st day to the 31st, those purchases will have to be paid on the 15th day of the following month.
The exact amount of your purchases will appear but so will a figure that will represent a minimum amount of payment that you have to make in case you cannot pay for the whole thing.
For the purpose of getting a good score on this category, you should pay for all of your purchases on deferred payment.
If you know you cannot pay for the entire amount, you should apply that purchase under a credit installment option.
Diversify on the type of your credit loans and make the payments
For credit card purchases, study each purchase.
Decide which ones to apply on an outright payment on a deferred scheme and which ones to pay on credit installment.
Use both credit schemes on the totality of your purchases.
Being able to mix these and successfully pay all obligations demonstrates you are a smart borrower and a dependable payer.
It shows you are most likely to be able to handle your new loan approval with the same diligence.
Credit Building Strategies
There is a way around the system if all you want is a good credit rating without the actual credit card.
You can get a secured credit card.
If you don’t want the temptation of falling into the uncontrollable urge to exhaust credit limits, use a secured credit card that will only allow you to purchase an amount equal to what you have deposited.
This is different from prepaid cards and debit cards that don’t report your transactions to credit bureaus.
A secured credit card provides you with the safety of a debit card and the credit history building advantages of a credit card.
Or, you can be an authorized user of another good credit account.
If your parents, brother or sister have a good credit rating, you can benefit from their good credit practice if you are one of their authorized users.
This means that their good credit scores will also be yours as you are sharing in the account.
It may be a little hard to win this trust but maybe if you let them keep the actual extension card, they will be convinced of your non-malicious intent.
If you already have a credit card then, these tricks will help you get a better credit rating.
You can apply for an increase in credit limit and not actually use the available credit.
This will improve you scores dramatically in that 30% component of your credit score which refers to your available credit line.
Increased credit limit
An increased credit limit will win you more points for as long as you don’t.
Increase your usage as well.
Also, one of the most effective ways of ensuring that you make those payments as they fall due is to apply for an automatic paying system or automatic debit system against your bank account.
You are not likely to forget to supply your deposit accounts with the sufficient balance especially if this is your salary and family savings account.
Lastly, you can always pay multiple payments.
This system will work best for people who get bi-monthly and weekly salaries.
Your current pay check may only be sufficient to pay the minimum on your monthly credit billing.
There is no rule against making another payment one week or two weeks after when you receive another paycheck.
Of course, this scheme will only work if you also work on limiting your credit card usage as well.
The rule is very simple, if I improve my credit, I will have better chances of getting approvals on the significant loans from the best lending companies that offer the lowest rates.
It is all a matter of setting the right perspectives in life.
Use your credit cards for less important purchases for credit rating sake so you’ll get the best chance for being approved for life-changing investments.