A high credit score indicates the tenant has solid money management skills, including timely bill payments. Conversely, a low credit score suggests they have a habit of missing payments, overspending, and taking on more debt than they can handle.
Tenants with low credit scores routinely struggle to secure rental agreements, as landlords don’t want to assume the risk of delinquent rent payments. In addition, they also face hurdles in obtaining credit cards, mortgages, and other loan products.
However, tenants can improve their credit scores over time by adopting prudent and time-tested financial habits. And with the help of a service like automated rent collection, you, as a landlord, can even help them achieve this goal!
Here are some tactics a tenant can employ to boost their credit score.
1. Make Timely Payments
Making timely payments consistently for an extended period is the best way for a tenant to raise their credit score. In fact, payment history accounts for a whopping 35% of an individual’s credit score. Thus, tenants should aim to pay their bills on time, without fail.
Given how vital on-time payments are for credit health, it’s wise for them to use automated payment processing wherever possible. By doing so, they can ensure they never miss a payment. And as long as payments are reported to credit bureaus (Equifax and TransUnion), tenants can gradually improve their credit scores.
As a landlord, a great way to help tenants reap the rewards of on-time payments is by using SingleKey’s Rent Collection tool. This platform reports all payments made to credit bureaus, whether on time or late. It acts as an excellent incentive for tenants to pay their rent on time, as each payment will work to enhance their credit.
Not only that, but the platform saves you time and effort each month when rent collection rolls around. That’s right – no more fumbling around with cheques and keeping track of endless e-Transfers!
2. Keep A Low Credit Balance
Credit utilization is another critical metric credit bureaus measure when assigning credit scores. It refers to the amount of credit a person uses relative to their credit limit.
Suppose a tenant has a credit card with a $5,000 limit and their current balance owing is $2,800. In that case, their credit utilization is 56% ($2,800 / $5,000).
High credit utilization suggests the person is charging too many purchases against their credit limit. As a result, they may face difficulty paying down their balance, especially if they face a steep interest rate. Not surprisingly, high credit utilization will decrease their credit score.
A good rule of thumb that tenants should observe is to keep their credit utilization between 30% and 35%.
3. Limit The Number Of Credit Checks
Hard credit checks are a routine part of lenders’ vetting process for evaluating loan applications. However, they also impair the applicant’s credit score, at least temporarily, as each one appears on their credit report.
For this reason, tenants should be mindful of the number of credit products they apply for. A slew of hard inquiries incurred during a short period suggests they may be in desperate need of credit – not good.
However, there’s one notable loophole. Credit bureaus record several hard credit checks done over a brief period (usually between two and six weeks) as a single inquiry for specific loan products. These are mortgages, car loans, or student loans. Credit bureaus understand that borrowers like to shop around and explore their options before signing up for such loans, so they judge these types of checks less harshly.
4. Consolidate Debt
Too much debt (especially the kind that charges high interest rates) can be overwhelming, leading to missed payments and an increased risk of default. A strategy tenants can use to ease the financial strain is to consolidate their debt.
Consolidating debt under a single loan low-interest loan is beneficial for three reasons:
- You save money on interest charges
- You pay off debt faster
- You only have one loan to track and manage
Two common ways to merge debt are through a personal loan or a balance transfer credit card.
5. Use A Variety Of Credit Products
Credit bureaus take note of the type of credit products individuals use when they assign credit scores. This factor is called the “credit mix.” A borrower using a wide array of credit products signals that they can comfortably manage different types of debt.
Let’s assume a tenant needs access to additional credit after maxing out their credit card. In that case, it would be better for them to apply for a short-term installment loan rather than a new credit card.
6. Use Credit Building Products
Credit building products are geared toward individuals looking to establish or fix their credit score but otherwise don’t qualify for standard loans. Two commonly-used products are secured credit cards and credit-builder loans.
A secured credit card is a unique type of card where the borrower must contribute a deposit before being able to use it. The credit limit is often limited to the size of the deposit.
A credit-builder loan allows borrowers to build their credit while saving money simultaneously. Instead of receiving money from the lender upfront, the borrower services the debt by making fixed monthly payments and interest. Once they repay the loan in full, they receive the principal amount from the lender.
7. Keep Old Credit Accounts Open
Experience matters when it comes to credit. The longer you’ve maintained one or more credit accounts, the better.
The average age of a credit account is a factor that credit bureaus consider when setting credit scores. As a result, tenants should never close credit accounts, even if they don’t have immediate plans to use them.
A high credit score is vital for anyone wishing to obtain a loan, be it a mortgage, line of credit, or auto loan. And, of course, it’s also necessary when applying for tenancy in a rental property.
With the right tools, strategies, and habits, tenants can work to improve their credit scores over time. And the best way they can start is by making on-time rent payments (it’s no accident that we listed this method as number one in this article!)
As a landlord, you can help them boost their credit – and, at the same time, make your job managing rent payments a breeze. By signing up for Singlekey’s Rent Collection tool, you gain access to a platform that allows you to collect rent payments from your tenants online, quickly and conveniently.
The platform is fully automated, which means you can forget about needing to take multiple trips to the bank to deposit cheques. You’ll receive your money in your account within two business days – that’s faster than some banks! And if tenants miss payments, there’s no need to send dozens of text messages and voicemails. SingleKey will do the job for you by sending them automatic reminders.
Setting up your account with SingleKey takes just five minutes – and there are zero fees for your first three tenants!