Use Your Rent to Own to Improve Your Bad Credit

January 19, 2017 by Marty Orefice | Credit, Financing, Rent to Own

It's important to be able to qualify for a mortgage at the end of your rent to own. Boosting your credit score helps!

Rent to Own Homes with Poor Credit

Rent to own is a good way to purchase a home if you have poor credit. It’s difficult to qualify for a mortgage when your credit is poor. Renting to own a home is a viable opportunity to improve your bad credit while saving up, even more, money for your down payment. Not only will your hard work help you qualify for a mortgage at the end of your lease, but the money you’ve saved will help decrease your interest rate too.

Typically, people enter rent to own agreements because their credit score is not high enough to secure financing for the home they want at that time. Rent to own is a great way to make payments towards the home of your dreams and build up your credit score for a few years. However, it is pointless to enter a rent to own agreement if you won’t qualify for financing to purchase the home at the end of the lease.

During the years leading up to your home purchase, work towards building your credit. Building up your credit not only increases your likelihood of securing financing, you may even get a better rate because of it. Speak with a qualified lender to find out where your credit score should be by the time the option to purchase your home comes up.

6 Ways to Improve Your Credit Score

In the meantime, work towards improving these six factors to having a good credit score. According to Credit Karma, these factors are key parts of the equation of calculating your credit score.

1. Lower Your Credit Utilization

Use the time that you’re in your rent to own agreement to lower your credit card debt. Your credit card utilization impacts your credit score strongly. It’s good to be using less than 30 percent of your overall credit limit, but the smaller percentage of your credit you’re using the better.

For example, if you have 3 credit cards: Discover, American Express and Visa. The Discover has a $500 credit limit; the American Express has a $1,000 limit; the Visa has a $2,000 limit. Your total credit line is $3,500. You should have less than $1,050 worth of spending across your three credit cards, at any given time. Having an even lower amount on your credit cards is even better for your credit score. The smaller your credit line, the less money you should have on your credit cards.

Work to pay off your credit card debt during the next few years, especially if it makes up more than 30 percent of your credit limit. You may be tempted to apply for new credit cards to increase your credit line and lower your utilization percentage, but be careful. Opening new credit cards affects your average age of credit history and your credit inquiries. Read through those sections before you decide to open a new card. It won’t hurt you to pay down your debt; however, opening a new credit card might hurt you.

2. Improve Your Payment History

You’ve got a few years to make your payment history look great. Set up automatic payment for all of your bills. Put a monthly alarm on your phone. Circle the dates in a thick marker on your calendar. Make sure that you are doing everything you can to make all of your payments on time between now and when you have the option to buy your dream home.

Your payment history has a high impact on your credit score. You can’t erase damage you may have already done, but you can minimize it. The greater the percentage of on-time payments you’ve had, the better. Over the next two years, work to increase that percentage.

3. Erase Derogatory Marks

Derogatory marks happen when a debt you owe is sent to a collection agency. They have a strong impact on your credit score. The larger the amount of the debt, the larger the impact on your credit score.

Call the collections agency if you think the debt is a mistake. They’ll be able to direct you to the best plan of action. They may even be able to remove the mark from your credit score. It can take more than a month for them to remove the mark from your credit, so call well in advance of when you plan to use your option rights.

You should still call the credit agency even if the marks are accurate. Pay off the debt, and over time it will have a lower impact on your credit score. The collections agency may be able to remove it from your credit report, but it’s a rare circumstance.

4. Lengthen Your Average Age of Credit History

Your average credit history is the average time you’ve had your credit cards open. For example, if you have had a Visa for 7 years, a Discover for 8 years and an American Express for 9 years, your average age of credit history is 6 years.

Ideally, your average age of credit history is 9 years and above. However, that may not be possible for everyone to achieve over the next few years. Don’t worry. There are things that everyone can do to improve this factor. For example, keeping longstanding credit cards open, not opening new credit cards and, possibly, closing out younger credit cards.

Keeping longstanding credit cards open

Closing long-time credit cards decreases your average age of credit history and lowers your credit score. For example, you’ve had your Visa card for 16 years, your American Express for 4 years and your Discover for 1 year. Your average age of credit history is 7 years. However, if you were to close your American Express, your average age of credit history would drop down to 2.5 years.

Don’t open any new cards

Opening new credit cards brings down your average age of credit history. It introduces a lower number into your average and brings it down. While it might be enticing for you to open your new card and lower your credit card utilization, you should know what kind of impact it will have on this factor too.

For example, you have three credit cards. You’ve had your Discover for 12 years, your MasterCard for 10 years and your Visa for 9. Your average age of credit history is just over 10 years, which is great for this factor. If you were to introduce a new credit card, your average age of credit history would drop to 7.75 years. While this isn’t a bad length of credit, it will lower your credit score from where it once was.

Your credit utilization percentage will decrease, which is good, but you will have a new credit inquiry on your account and your average age of credit history will decrease. If you have enough time to bring up your average age of credit history and for the credit inquiry to fall off your score, it might help you in the long run, but there are no guarantees. It is much simpler to just pay off your debt.

Close out younger credit cards

This is a risky strategy. It’s important to weigh out the pros and cons before deciding to use this strategy. While there are situations when it would be a good idea, there are also situations when it would be a very bad idea.

The pro is that closing out younger credit cards will increase your average age of credit. For example, you have an American Express for 2 years, a MasterCard for 6 years, a Visa for 9 years and a Discover 12 years. Closing out the American Express will increase your average age of credit history from 7.25 years to 9 years.

The con is that your credit line will decrease and your credit utilization percentage may increase, as a result.

Do the math to make sure that closing your credit card won’t increase your credit card utilization above 30 percent. Figure out how much debt you have tied to all of your credit cards and what your full credit line would be without your youngest card. For example, if your youngest card has a $500 credit line, subtract that amount from your total credit line. If this number is still below 30 percent, it might be a good idea.

If your credit card utilization is 30 percent or above, it probably isn’t. Instead, work to pay down your debt. This may be a good strategy for you once you’ve paid off what you owe.

5. Increase Your Total Accounts

Lenders like to see that other people have trusted you with money before they trust you with money. Your accounts are credit cards, loans and financing that you’ve had in your name throughout your life. A credit card you had open when you were 20 still counts towards this statistic when you’re 60.

This factor has a smaller effect on your credit score than the previous factors. It’s hard to manipulate this number because doing so will likely hurt your credit score in other ways. This factor is built up over time and with age.

6. Reduce Credit Inquiries

Credit inquiries happen when a lender does a hard pull for your credit score. Lenders do this to see your credit score when they’re deciding whether to loan you money. It takes two years for a credit inquiry to stop affecting your credit score. While credit inquiries have a low impact on your credit score, every point counts! Refrain from taking out loans, opening credit cards or getting financing beginning 2 years before you plan to make a purchase.

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