8 Tips to Help Improve Credit Scores

VOLUME 5R

By Jonathan Pressman

Credit scores are a critical component in any rental application. Before agreeing to rent a home, landlords will request a credit check on prospective tenants to help determine how likely they are to pay the rent. Here are eight tips renters can use to help improve their credit scores in advance of submitting a rental application.

1. Make Payments on Time

Timely payments consistently improve or maintain a good credit score. Fair Isaac Corporation (FICO) credit scores are split up into five categories, with payment history accounting for 35% of the total—more than any other category.

2. Be Patient

Credit scores can drop quickly. Unfortunately, they won’t increase significantly overnight. It can take several months or longer for better credit habits to bring up credit scores. For those who have ever filed for bankruptcy, it can take a minimum of six years. Applicants of new credit cards, maxed-out credit cards and credit card closings are much shorter at a three-month average. Missed/defaulted payments are somewhere in between at an 18-month average.

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3. Spend Less

Spending less money can positively impact credit by lowering the amount a borrower owes and reducing their credit utilization. Lenders often view individuals with high credit balances as riskier borrowers, and their credit scores can suffer because of these high balances.

4. Have Different Types of Loans

It might seem counterproductive at first, but having multiple different loans (ex. credit cards and auto loans) may be helpful to credit scores. Credit scores are made up of more than just the amount owed and payment history. While these two factors are the most important components in determining an individual’s credit score, credit mix is one of the categories that is often overlooked. That way, credit agencies can verify that the borrower is not only likely to pay back the money they borrow but can also manage different types of debt.

5. Fix Errors

Credit reporting errors are commonplace. According to Consumer Reports, 34% of consumers found one or more mistakes in their credit reports. These errors can include (but are not limited to) incorrect names or contact information, identity theft, inaccurate reporting and balance errors.

Prospective tenants who find inaccurate information on their credit reports can dispute those errors by writing to the credit reporting agency. The Federal Trade Commission (FTC) offers guidance on its website for how to dispute credit reporting errors for each credit bureau.

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6. Ask the Issuer for an Increased Limit

An increased credit limit can reduce credit utilization, which can boost credit. For example, a borrower spending $3,000 per month with a $5,000 credit limit will have a credit utilization of 60%. If the borrower’s credit limit is increased to $10,000 and this individual spends the same $3,000 monthly, the credit utilization ratio will drop to 30%, helping to improve credit.

7. Avoid Closing Old Accounts

Length of credit history is another category that plays into an individual’s FICO score, accounting for 15% of a borrower’s credit report. Some account holders make the mistake of closing old accounts because they don’t use the cards often.

Keeping old accounts open is an important contributor to an individual’s credit score because it extends the overall length of credit history across all accounts. However, credit card companies may close inactive accounts on their own, so make sure to occasionally use and pay the balance in full to keep the card active.

8. Become an Authorized User on Someone Else’s Account

For prospective tenants who have not established their own credit history, becoming an authorized user on someone else’s credit card may help increase their credit scores. They will benefit from association with the cardholder, if the latter person has a longer credit history and higher credit limits.

Authorized users stand to gain a lot from piggybacking on someone else’s account, but only if the account holder is in good standing. If the account holder doesn’t have a good credit score, it could negatively impact the authorized user’s credit score. Call the credit card company to be removed if this becomes a pattern.

When evaluating prospective tenants, landlords will look closely at an applicant’s credit score, income and background. While renters don’t have the same level of housing control as a property owner, they do have full control over their credit scores. By borrowing responsibly, being patient and ensuring their credit reports are accurate, renters can increase their odds of getting approved for their next rental.

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