If you rent an apartment or home, you may be interested in building your credit to buy a home in the future. Perhaps you are happy renting, but want better credit to make future rentals, credit card applications, and car loans easier and more affordable. Whatever your motiviation, raising your credit score is an important part of keeping your personal finances on track for long-term success.
You may be surprised to learn that you can build and improve your credit by paying your rent. Some landlord payment services and third-party tools give you the ability to get credit for an on-time rent payment on your credit report. But there’s a catch. It is far from free. Let’s take a look to decide if this type of product makes sense for building your credit.
How rent can build your credit
Some landlord payment services and third-party rent payment services give you the option to report rent payments to your credit report. Before paying to do this, it is important to understand the pros and cons and how it works.
When you get set up with the rent payment credit reporting service, the payment provider reports a new “credit account” to one or more credit reporting agencies. This means your monthly rent looks just like a credit card to the credit reporting agencies, banks, and other lenders.
An on-time payment counts as an on-time credit card payment. As long as you do this, it should slowly and steadily raise your credit score. But remember that your credit score includes factors like average age of credit and gets harmed temporarily by new credit. If you miss a rent payment or move quickly, you could end up harming your credit.
These types of systems only work and make sense if you plan to stay in the home for a long time and pay for the credit report service for at least a year. Otherwise, you could end up hurting your credit and paying to do so, or coming out with a no major benefit with an expensive price tag.
The cost of credit reporting for your rent
Most credit reporting services for renters charge a payment fee and a monthly service charge. A review of several of these services show monthly service charges around $10 to $20 per month plus around 3% of the monthly payment.
That means a $1,000 rent payment could cost as much as $50. Is it worth $50 per month to get a positive credit payment every month. But remember, you can get that for free in many circumstances.
If you open a credit card with no annual fee and pay it off in full every month, you’ll never pay interest and get a free positive credit payment every month. You get that even if you don’t use the card. Just be sure to use it for a small purchase at least a few times a year to keep the card active.
You get these benefits even if you move. In the eyes of the credit reporting companies, the monthly rent payment and a credit card payment are considered equal.
Also note that some monthly rent credit reporting companies only report to one credit bureau. If you want to raise your credit score at all three, a credit card is more likely to do the trick.
Do a cost-benefit analysis to decide if it’s worthwhile
If you have terrible credit and want to buy a home in the next year or two, it could be worth $50 per month, or $600 per year, to get good marks on your credit. You would be paying to prove you are a responsible “borrower” in a way that improves your credit score and credit report over time.
But if you already have good credit or don’t have any big plans for your credit, hundreds of dollars per year for credit reporting on your rent is not worth the cost. You can do the same with good credit habits using a secured credit card, student credit card, or another credit card with a much lower cost, if any. Why pay for something you can get for free? If it isn’t urgent, you shouldn’t.
Most people are best to follow these simple steps to improve your credit without spending an arm and a leg to get your rent counted as a credit card payment. Here are some basics to raise your credit score over time:
Pay off credit card balances – Getting your balances to $0 is the fastest way to raise a credit score in many cases. Contrary to a popular myth, there is no benefit in carrying a balance. It just costs you money and hurts your credit score.
Always pay on time. This is one of the biggest factors in your credit score. Never, ever pay late. It’s better to avoid using credit altogether than use credit and miss payment due dates. It takes seven years to fix a history of late payments.
Take on new credit responsibly – Applying for credit and opening new accounts temporarily lowers your credit score. But more accounts with perfect payment histories raises your score over time. Remember these credit results before signing up for any new credit account.
Joining the 800+ credit score club is simple, but often easier said than done. Following some basic rules will help you grow your credit score without the big costs of a rent to credit reporting service.
Keep a long-term focus with your credit
Rent credit reporting companies often advertise that putting your rent payments on your credit is a quick fix to past credit mistakes. That is an exaggeration. There are no quick fixes to credit problems. It takes 7 to 10 years in most cases for past blunders to drop off of your credit history.
With that long-term in mind, you may decide it is worth it to get your rent on your credit report. But don’t feel pressured to do so. In most cases, you can get the exact same service for no cost from any major credit card issuer. Just make sure to use those cards responsibly or you could end up in worse credit shape than you are today.