9 Ways to Improve Your Credit
for Rent-to-Own Buyers
#9 Close out old accounts
In some cases if you have TOO MUCH available credit on your credit report it can hurt your score and reduce the amount lenders are willing to loan you. This can happen to people who have long credit histories. Old, unused accounts are never closed but they do count as available credit nonetheless.
If your credit score is suffering from too much available credit it may be to your advantage to close out a few of those old accounts. However, if you do this you need to close these accounts early, well before you apply for a mortgage. Closing them too close to the time when you apply for a mortgage won’t help your credit score at all.
# 8 Minimize inquiries on your credit report
Excessive inquiries on your credit report can hurt your credit score. Inquiries mean whenever you apply for credit from someplace the lender will check your credit report – that’s an inquiry. If too many lenders check your credit it can decrease your score.
The best way to reduce the number of inquiries is not to apply for loans or store credit cards. This is particularly important during the rental period of a rent-to-own. If you are trying to rebuild your credit so you can qualify for a mortgage you need to minimize these types of hits against your credit score.
# 7 Don’t take on new debt
Boy, I can’t emphasize this one enough. When you move into a new house how tempting is it to go out and buy new furniture or new appliances? It’s a new house right? You want new things to go into it.
This is like suicide for rent-to-owns. You are supposed to be improving your credit and not taking on new debts is critical! Not only that, but the payments on those new debts will also reduce the amount of mortgage you can qualify for. I talk about this in the book - even a monthly payment as little as $25 can reduce the amount of a mortgage you can qualify for by $4,000. Is that new couch really worth it if you can’t buy the house at the end of the option period?
New debts are a triple whammy against your credit:
- They result in an inquiry against your credit score
- Having more debts brings down your credit score
- Having monthly debt payments will reduce the amount of mortgage you can qualify for
That being said there is one case in which taking on new debt can help you - if you don’t have enough established credit to qualify for a mortgage. This only applies to people who are very new to building their credit. It is not intended for people who are trying to RE-BUILD their credit. Additionally the only way it helps is if that debt is PAID OFF at least 3 months before you apply for a mortgage. If it isn’t paid off long enough before you apply for a mortgage it won’t register on your credit report as paid off yet. These things can be slow to update so you need to give yourself plenty of time.
# 6 Have established accounts in good standing
Nothing shows creditworthiness than already proving you are. If you have established accounts on your credit report make sure they stay in good standing. Don’t close out those good accounts (unless you have too many, as I said above). Pay those good accounts on time, too.
If you’ve proven that you are a trustworthy person with those accounts it will go a long way to help show that you will be trustworthy on a mortgage.
# 5 When you have debts close to the credit limit – split between two accounts
This is one of those funny little tricks of good credit. If you have any credit card debts that are more than 75% (some people even say 50%) of the available credit, it’s better to split that debt between two credit cards (if you already have an extra credit card, I’m not suggesting you sign up for a new card just to do this). You aren’t reducing the total amount you owe in any way, you are just splitting it between two accounts, so you are reducing the ratio you owe compared to the total credit line. That ratio is actually important for your credit score.
Here is an example to clarify this. Let’s say you have one credit card with a $5,000 balance and your credit limit on that card is $6,000. That means you are using about 83% of your available credit on that card. If you have a second credit card without a balance, (to keep it simple we’ll say it has the same credit limit of $6,000), transfer $2,500 from the first card to the second. That way both credit cards have $2,500 on them. Like I said you aren’t reducing the amount you owe, but you are now only using about 42% of your available credit on each of those cards. Going from 83% debt on one card to 42% on two can actually help your credit score.
# 4 Stop using your credit cards
Even if you weren’t trying to improve your credit I would suggest this one. Credit cards are just sickeningly easy to get in trouble with. I don’t know many people that have credit cards that haven’t gotten into trouble using them at some point in their life. Just keep this in mind – the more credit card debt you have the lower your credit score.
Just stop using the darned things. Not only do they lower your credit score when you have higher debt, but remember that when the monthly payment on your credit cards goes up the amount of mortgage you can qualify for goes down – by thousands of dollars!
# 3 Pay off debts
The fewer debts you have the better your credit score will be. Tighten your monthly budget some to increase the amount you have available to pay off some of your outstanding debts. It’s a good idea to talk with a mortgage broker about creating a plan for paying off debts.
Typically a good way to do this is to start by paying the smallest debt off first and then the next smallest and so on. I go into details for this technique in the book and it can be very effective at getting rid of some of those debts.
Remember, paying off debts not only increases your credit score but the fewer monthly payments you have the more mortgage you can qualify for. In chapter 3 of Rent-to-Buy I talk about front ratios and back ratios, and paying off some of your existing debts can help you meet your back ratio.
# 2 Pay everything on time
This is the second-most important thing you can do when it comes to improving your credit score. If you want to qualify for a mortgage you absolutely MUST make all of your monthly payments on time! NO late payments. NO bounced checks. NO excuses!
Consistent, on time payments will really help your credit score. Not only that, but if you make even one late payment during your rental period you may not be able to qualify for a mortgage at the end. Lenders HATE to see late payments on your credit, so once you start an option period make sure that you make those payments on time. Remember if you can’t qualify for a mortgage your option fee is non-refundable. You don’t want to lose that money or the house.
# 1 Sign up for a credit repair service
When our credit reports have damaging items on them, sometimes the only way to get your credit score high enough to qualify for a mortgage is to get those damaging items off. This is where credit repair comes in. A REPUTABLE credit repair company can help you repair your credit and help you remove damaging items from your credit report. In fact, in cases where a buyer cannot qualify for a mortgage and wants to do rent-to-own, I almost always recommend they sign up with a credit repair company.
If you are serious about doing rent-to-own, working with a credit repair company is a must. I recommend www.renttoowncreditrepair.com. They are a reputable company that can often achieve impressive results at rebuilding your credit.