Are you a renter looking to improve your credit score? Understanding the rent and credit score relationship is a key step towards achieving your property goals.
Buying a house or a flat is exciting, and it’s important to ensure that you have all the necessary information you need to start this process. A good estate agent can be a valuable ally in navigating your property journey, ensuring you're well-informed and prepared.
What is a credit score?
Your credit score is a 3-digit number that reflects your creditworthiness. It's a crucial factor that banks and lenders use to gauge your financial health, especially when determining your ability to manage loans and credit. A higher score can enhance your chances of being offered more credit at better rates.
What is your credit score based on?
A credit score is based on various factors and information collected by the credit reference agency. Credit reference agencies collect information from public records, e.g. the electoral register and court records, and from lenders and service providers.
In general, it is based on your track-record of any credit repayments, for example from your credit card or phone contract. In other words, it’s mostly based on how well you repay what you borrow.
How is your credit score calculated?
As mentioned above, your credit score determines how reliable you are when borrowing and repaying loans. Different lenders use different credit reference agencies to complete your credit check. Each of these agencies, Experian, Equifax and TransUnion have their own scoring system, ranging from very poor (000) to excellent (999 or 1000).
To give you an idea of what a credit score scale may look like, here’s an example of how Experian provides its credit scores: 999-961 is rated as excellent, 960-881 as very good, 880-721 as good, 720-561 as poor and 560-0 as very poor.*
What is a good credit score?
As a general rule of thumb, the higher the score, the higher your chance of being accepted for a loan. The scale tends to range from very poor to excellent. There is, however, no specific number that will guarantee you’ll be accepted for a loan, as every lender may have varying criteria that could work in your favour or not.
Understanding the credit score for renters
For renters, the credit score is influenced by various factors, including rental payments and credit score correlations. Like with non-renters, credit reference agencies gather data from public records and your repayment history on credit accounts to calculate your score.
Historically, rent wasn't treated like other factors that affect your credit score, such as mortgage repayments. However, this has changed, and now regular, timely rental payments can be included on your credit report, potentially aiding your mortgage applications and demonstrating your creditworthiness.
What’s the difference between a soft credit check and a hard credit check?
You may be curious to know whether you have a good credit score. You can check this by doing a soft and hard credit check. So, what’s the difference between the two?
A soft credit check helps you gain a better understanding of what your credit score could be so that you can easily compare different products. A company might also perform a soft credit check to confirm your identity. In some cases, you might choose to perform a soft credit check when you’re thinking about applying for a loan or are simply curious to understand where you stand. Most importantly, a soft credit review won’t affect your credit score, as they aren’t recorded on your credit report.
A hard credit check is done when you submit a credit application. The lender you’re applying to will then request your permission to complete a full credit check. A hard credit check is recorded on your credit report and can affect your credit score. Having multiple hard checks over a short period of time can reduce your chances of having a loan application approved.
How to raise your credit score while renting
Several credit score improvement strategies can be particularly effective for renters. Here are some tenant credit score tips:
- Ensure on-time rent payments are recorded, as they can positively impact your score. Rent reporting services can help you do this by verifying and recording your rental payments with credit reference agencies.
- Stay within credit limits and avoid unnecessary overdrafts to demonstrate sound financial management.
- Register on the electoral roll to improve your visibility to credit agencies.
- Be mindful that hard credit checks can influence your score, so limit them to necessary applications.
This, by no means, is a complete list, but the above will give you an idea of how you can build a positive credit history. Then, when the time comes, and you’re ready to apply for a loan to buy a property, you’ll be ready to start your property journey.
