This week I was inspired by an article I read in Forbes Magazine and wanted to write a blog directed to those who are currently renting, but are considering a purchase in the near (or far!) term. According to Forbes, "For as long as credit scores have been around and Americans have fretted about them, the three-digit number has ignored what for many is their biggest monthly expense: rent."
However, new developments are occurring in the credit industry and millions of American renters may see their credit scores rise from paying rent on time. The credit industry, consisting of the three all-powerful agencies, Equifax, Experian and TransUnion, is on board with factoring rent into credit scores. Checking your (and your partner's) credit score is essential in the months leading up to your home search, and subsequent mortgage application process, because if there are any errors or issues with your credit, you will need to spend time correcting or improving the score.
So what is a good credit score anyway? According to Zillow, credit scores range from 300 (poor) to 850 (excellent). Credit scores are calculated by looking at the following five factors:
Past payment history (35% of a score is determined by this; the more bills consumers pay on time, the better their score).
Amounts owed (30%; consumers who have used up a large percentage of their available credit will likely have lower scores).
Length of time a consumer has had credit (15%; a longer credit history tends to be better).
New credit (10%; consumer who open up a lot of new credit at once may hurt their scores).
Type of credit (10%; a variety of different types of credit like installment loans, credit cards and retail accounts tend to boost credit scores).
The Forbes article continues, "Including an individual's rent payment history can also be particularly beneficial for people who are working to build better credit history. With rent reporting, eight in 10 renters with a credit score below 641 points saw their scores increase just one month into a new lease, according to TransUnion."
I see this as an important sea change coming to benefit those who are renting since the housing crash. According to the Joint Center for Housing Studies at Harvard University, in 2013, there were 43 million households that rented within the U.S., which represented 34% of all households, which was up from 31% in 2004. Try LRA's easy to use mortgage calculator tool here to see if you may be able to afford a new home!
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